For most investors, building a successful portfolio largely hinges upon buying all-weather stocks. This simply means the underlying companies behind the stocks can remain profitable through the likes of recessions, wars, and natural disasters.
Shares of the auto parts retail giant AutoZone (AZO -0.02%) arguably fit the bill. But after surging 17% year to date in a down market, this begs the question: Are shares of the stock still a buy for growth investors?
Let's dive into AutoZone's fundamentals and valuation to try to find the answer.
Fundamentals are driving sales and earnings higher
Since its founding in 1979, AutoZone's presence has blossomed into nearly 7,000 stores throughout the U.S., Mexico, and Brazil. So how did the company become one of the most formidable aftermarket auto parts retailers in the world?
Image source: Getty Images.
The company's wide selection of parts makes it likely that they can meet the needs of both do-it-yourselfers looking to repair their vehicles and professional shops alike. Along with a knowledgeable staff, this winning combo has earned AutoZone the trust of its customers and a wide moat in the process.
The retailer recorded $4 billion in net sales during the first quarter ended Nov. 19, an 8.6% growth rate over the year-ago period. Due to the ongoing semiconductor chip shortage and resulting cuts in new vehicle production, the average age of the U.S. vehicle fleet is more than 12 years. Because older cars need recurring, expensive repairs, this helped AutoZone's same-store sales grew at a 5.6% rate in the quarter. Coupled with a 2.8% increase in the company's total store count, AutoZone's net sales compounded at a high-single-digit clip for the quarter.
The company logged $27.45 in diluted earnings per share (EPS) during the first quarter, up 6.9% from the year-ago period. Howerver, inflation and higher sales volume caused AutoZone's cost of sales to surge 14.1%. This led the company's net margin to drop 160 basis points year over year to 13.5% in the quarter. But a 9.1% reduction in AutoZone's diluted share count from share buybacks more than offset the dip in profitability for the quarter.
Given that AutoZone's has fewer than than 800 stores between Mexico and Brazil, international expansion is almost a certainty. This is partly why analysts are projecting 11.3% annual diluted EPS growth over the next five years, which is better than the specialty retail industry average of 10.3%.
An already decent financial condition should improve
AutoZone's growth prospects are rather strong, and the company has the financial positioning to execute on its growth ambitions moving forward.
This is because AutoZone's net debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio will come in around 1.6 for the current fiscal year of 2023. And as the company's profits expand and debt is reduced, analysts anticipate that the net debt-to-EBITDA ratio will significantly improve to 0.8 by fiscal 2025.
Putting this into perspective, AutoZone's net debt-to-EBITDA ratio will be much better than Genuine Parts Co.'s net debt-to-EBITDA ratio of 1.1 by that same time. This means that by fiscal 2025, AutoZone could completely repay its debt in around a year, without share repurchases and inclusive of interest expenses and taxes.
The entry point remains attractive
Despite AutoZone's outperformance in 2022, the stock still appears to be a no-brainer buy for growth investors at the current share price.
AutoZone's forward price-to-earnings ratio of 16.9 is moderately above the specialty retail industry average of 15. But with superior growth prospects and a strengthening balance sheet, AutoZone is worthy of a premium valuation.
