Buying stocks with consistent track records of enriching shareholders is a smart strategy for growing richer over time.
Having beaten the S&P 500 index in seven out of the past 10 years, AutoZone (AZO -1.45%) has been a tremendous stock for growth investors in recent years. And this admirable performance looks poised to continue in the future.
The company just keeps on growing
With a presence of 7,000-plus stores in three of the largest economies in the Americas (i.e., the U.S., Mexico, and Brazil), AutoZone is an established player in its industry. To understand how the company can succeed moving forward, it's important to know how it has achieved such significant success since its first store opened in Forrest City, Arkansas, in 1979.
From the beginning, AutoZone insisted upon offering everything that its customers could possibly need to maintain their vehicles. Along with knowledgeable employees and possibly the first parts quality control program in its industry, this allowed the company to deliver an all-around shopping experience that keeps customers coming back.
| Metric | Q3 2022 | Q3 2023 |
|---|---|---|
| Same-Store Sales Growth Rate | 2.6% | 1.9% |
| Total Store Count | 6,846 | 7,044 |
| Net Margin | 15.3% | 15.8% |
Data source: AutoZone Q3 2023 earnings press release and AutoZone Q3 2022 earnings press release.
AutoZone's net sales grew by 5.8% year over year to $4.1 billion during the fiscal third quarter (ended May 6). As has been the case in previous quarters, the aging fleet of vehicles in the U.S. played a major role in the auto parts retailer's respectable top-line growth: The total average age of the U.S. vehicle fleet recently clocked in at 12.5 years.
As owners strive to keep their older vehicles on the road, the need for replacement auto parts should remain high. And because the company's major markets are far from saturated (especially in Mexico and Brazil), its hundreds of store openings in the past year were met with enthusiasm from customers. This also helped to power net sales higher for the quarter.
AutoZone's diluted earnings per share (EPS) surged by 17.5% over the year-ago period to $34.12 in the fiscal third quarter. The company did a decent job of keeping its expenses in check as its net sales increased, which helped its net margin to expand by 50 basis points during the quarter. Combined with a significant (7%) reduction in its diluted share count, that's how diluted EPS growth outpaced net sales growth for the quarter.
As AutoZone opens more stores in Mexico and Brazil and repurchases shares, future growth should be strong. Analysts anticipate that the company's diluted EPS will compound by 8.8% annually through the next five years.
Image source: Getty Images.
A solid balance sheet
AutoZone's growth potential is robust. But that means nothing if the company doesn't possess the financial capability to implement its growth strategy through opening additional stores and share buybacks.
Fortunately, AutoZone's financial health is vigorous. The company's estimated $6.5 billion net debt load for the current fiscal year ending in August seems manageable. That's because, against the $3.9 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) that is expected this fiscal year, that is a net debt-to-EBITDA ratio of just under 1.7. And as the company continues to grow and repay debt, analysts believe the net debt-to-EBITDA ratio will fall to just 1.1 by fiscal year 2025.
AutoZone is a great stock at a decent valuation
AutoZone's forward price-to-earnings (P/E) ratio of 16.5 is moderately above the specialty retail industry average forward P/E ratio of 14.9. For this reason, the stock probably won't catch the attention of value investors. But for growth investors who are aware of its remarkable wealth-building track record, AutoZone is arguably valued within reason and a no-brainer buy.
