With more than 6,400 stores in the United States, nearly 800 locations in Mexico, and 127 shops in Brazil, AutoZone (AZO 0.76%) is a leading retailer of automobile replacement parts and accessories across the Americas.
Over the last 20 years, AutoZone has delivered total returns of roughly 4,000%, making it a 41-bagger in a relatively short period -- for true long-term investors, at least. These results are particularly incredible because they occurred despite the company's sales only tripling over those two decades.
With masterful capital allocators at the helm, AutoZone has provided investors with market-smashing returns -- and looks poised to continue doing so. Here's what sets AutoZone apart from the crowd.
NYSE: AZO
Key Data Points
AutoZone's market-beating indicators
AutoZone currently has three specific market-beating indicators working in its favor that I believe will continue to push its stock price to new highs.
1. A top-tier return on invested capital
First, the company has maintained an average return on invested capital (ROIC) of 53% over the last decade. Measuring the company's profitability compared to its debt and equity, that high result shows that it is an expert in generating new net income as it expands its geographic footprint across the Americas.
Just how vital is this high ROIC advantage to investors? Between 2004 and 2019, the 40% of stocks with the highest ROICs in The Motley Fool's investable universe gained 739% in value vs. 423% for the universe as a whole. With AutoZone historically ranking in the top 20% of S&P 500 stocks for ROIC, the auto parts retailer has a long track record of expanding profitability, giving it a wide reinvestment moat.
2. A wide reinvestment moat
For a company to have a "reinvestment moat," it must not only possess one or more of the traditional competitive advantages, but also the persistent ability to reinvest its profits in similarly profitable opportunities. The result is compound growth, as yesterday's profits produce more returns down the road. AutoZone has a high ROIC, but what makes it an excellent investment today is that it still has a long runway for growth ahead of it even though it is already a leading retailer in its niche.
AutoZone's network accounts for 16% of the auto parts stores in the U.S., giving it unmatched heft. Given that smaller regional and local retailers still operate roughly half of the auto part stores in the country, AutoZone is well-positioned to take advantage of consolidation opportunities.
Powered by this potential consolidation and the remaining greenfield opportunities in the U.S., management believes the company can add another 4,000 stores domestically. It plans to open roughly 300 new U.S. stores and 200 new international stores yearly by 2028 -- a dramatic increase from the 190 store openings it has averaged annually since 2019.
Image Source: Getty Images.
3. Consistent share repurchases
While AutoZone is a compelling stock to own thanks to this reinvestment moat alone, its never-ending willingness to buy back shares with any leftover free cash flow sets it apart from the crowd. Since 2004, the company has lowered its total shares outstanding by 79%.
The compounding power of a consistent, decades-long, share buyback program like AutoZone's can provide enormous returns to investors who buy and hold for the ultra-long term. For instance, while the company's net income has quadrupled over the last two decades, its earnings per share are more than 20 times greater due to the dramatically reduced share count.
AZO Net Income and EPS (TTM) data by YCharts
Companies with strong track records of buying back their shares tend to be winning investments, as a recent study from S&P Global showed. As a group, the top 100 most buyback-heavy stocks in the S&P 500 from 2000 to 2020 beat the returns of the broader index by 5.5 percentage points annually.
A reasonable valuation for AutoZone
Despite the fact that AutoZone has delivered total returns more than seven times higher than the S&P 500 since 2004, its forward price-to-earnings (P/E) ratio of 21 remains well below the index's average of 29. Not only is this a reasonable price for investors to pay for shares, it's a fair price for the company to pay as well, so we can expect share buybacks to continue.
Over the long haul, investors will want to monitor the ongoing shift toward electric vehicles (EVs) and ensure that Autozone uses its distribution strength to capitalize on this transformation. Ending the year with 210 "hubs" and 98 mega hubs -- which store two times and four times as many stock-keeping units (SKUs), respectively -- AutoZone is well-positioned to grow its SKUs as needed for EV parts and increasingly tech-dense cars.
Ultimately, between its high ROIC, its ability to continue deploying capital on growth opportunities domestically and internationally, and its impressive stock-buyback track record, AutoZone looks poised to keep on delivering multibagger returns for years to come.
