Quality stocks often trounce the broader market. That's because their underlying businesses are growing year in and year out. This is typically from a combination of selling more goods or services at higher prices over time.
Compounding at 19% annually over the last 10 years, a $10,000 investment in the aftermarket auto parts retailer AutoZone (AZO 0.93%) would now be worth nearly $57,000. This is head and shoulders better than the 11.9% annual total return rate posted by the S&P 500 index during that time, parlaying a $10,000 investment into just shy of $31,000.
Past performance isn't a guarantee of future results. But the company's outperformance appears poised to continue, making the stock a buy for growth-focused investors. Here's why.
Net sales and earnings are zooming higher
As of late August, AutoZone's corporate footprint included nearly 7,000 stores throughout the U.S., Mexico, and Brazil. This extensive presence across three of the largest economies in the Americas has paid dividends for the company for many years now. And the close proximity of many consumers to AutoZone's stores has been especially beneficial to both the company and its consumers during the COVID-19 pandemic.
AutoZone's net sales climbed 8.9% higher year over year to $5.3 billion for its fourth quarter ended Aug. 27. What was behind the large-cap company's encouraging growth rate in the quarter?
One key trend that has lifted AutoZone's net sales in recent years continued to play out in the fourth quarter: the aging of the U.S. auto fleet. As recently as this year, the average vehicle in America reached a new record of 12.2 years. Various factors played a role in the continuation of this trend. Rising gas prices and inflation ate away at discretionary income for new car purchases, not to mention that supply chain issues with semiconductor chips the last couple of years have limited automaker production of new vehicles.
As a result, more consumers turned to the auto parts retailer to keep their used vehicles on the road. AutoZone's comparable-store sales rose 6.2% over the year-ago period in the fourth quarter. And the opening of an additional 118 stores contributed to the remainder of the company's net sales growth during the quarter.
AutoZone's diluted earnings per share (EPS) roared 13.4% higher year over year to $40.51 for the fourth quarter. Higher costs led to an 85-basis-point decline in the company's net margin to 15.1% in the quarter. But this dip in profitability was more than made up for by AutoZone's demonstrated ability to retire its shares at a rapid rate. To this point, the company's weighted-average diluted share count plunged 9.9% to 20 million during the quarter.
And AutoZone's impressive momentum for the fourth quarter looks built to endure. Thanks to international expansion in Mexico and Brazil and significant share repurchases, analysts are expecting 13.3% annual diluted EPS growth through the next five years.
Image source: Getty Images.
The company is a financial fortress
If AutoZone's promising growth forecast isn't enough to woo investors, its solid and strengthening financial position just might be.
The company's interest coverage ratio in its fiscal year ended 2022 came in at 17.1 ($3.3 billion in earnings before interest and taxes/$192 million in interest expense). This was a moderate improvement over 2021's interest coverage ratio of 15.1 ($2.9 billion in EBIT/$195 million in interest costs). AutoZone's financial health builds in a margin of safety for it to come out bigger and better on the other side of just about any economic environment. This should bring peace of mind to shareholders through turbulent times.
A cheap, world-beating stock
Based on its fundamentals, there is a compelling argument for AutoZone's shares. Yet the stock doesn't seem to be getting the recognition that it deserves from the market.
This is evidenced by a forward price-to-earnings (P/E) ratio of 14.7, which isn't much higher than the specialty retail industry's average multiple of 12.7. Considering that AutoZone's 13.3% annual earnings growth outlook is far more than the specialty retail industry's 9.9% projection, this is an appealing valuation for the auto parts retailer.
