On February 11 I wrote an article about the auto industry, and how smart investors would choose auto parts retailers rather than the auto manufacturers. In that article I highlighted Genuine Parts Company, however I believe the most investor friendly company in the industry may very well be Autozone (AZO 2.33%).
Ahead of their Q2 2014 earnings that are slated to be released before the open of markets on March 4, 2014, I'd like to point out a few things that should make investors love this company.
Autozone is in the business of selling aftermarket automotive parts. This is an intriguing industry because cars are always in need of small tune ups or upgrades, even more so in down years as consumers are more averse to borrowing to buy a new car.
First glance
A quick glance at Autozone's balance sheet may scare off many investors, and that could be why this company is only trading at 18.8 times earnings currently. As of the end of last quarter, their balance sheet showed negative stockholders' equity, referred to as stockholders' deficit. This means that liabilities are greater than assets, which is typically a red flag in any investment analysis. However a deeper look into this issue could actually encourage us to like this company more.
Autozone has been aggressively buying back shares for many years now, and just between FY 2009 and FY 2013, Autozone has purchased $6.4 billion of their own shares on the open market . In that same time period the company has only earned $5.2 billion. Everyone knows that spending more than you earn is a recipe for disaster, but we need to take a look into the financing behind these buybacks.
Responsible leveraging
The executive officers and board of directors own 2.7% of the outstanding stock of this company , so you don't have to worry too much about misaligned interests. Management has been using leverage very wisely and responsibly to increase value for shareholders. Autozone is taking advantage of the extremely cheap financing available in today's markets.
Autozone has created a ladder of long-term debt totaling $4 billion which has between $200 million and $800 million due every year or two between now and 2023. In 2013, they paid back $500 million that cost them approximately 6% a year, and then issued $800 million of new debt due in 2023, costing them around 3.25% a year .
Over the past five years interest expense has averaged 12.4% of their EBIT (earnings before interest and taxes), or operating income. In the same time frame interest expense has averaged only 2% of revenues. These numbers show that debt is being used very responsibly, and they are not taking on more than they can handle.
Efficient operations
Over the last fiscal ten years, Autozone has increased revenues on average by 5% a year and earnings by 6% a year, helped by average profit margins of over 10% and growing. Helped by the massive share buyback program, earnings per share over the last ten years have grown on average by an outstanding 15.5% a year. I typically also like to gauge management efficiency by return on equity, however in this example that calculation isn't possible, so as a proxy I will use return on assets, which has averaged almost 14% over the last ten years .
To put some of these numbers to the test we can compare results with Advance Auto Parts (AAP 0.52%) and O'Reilly Automotive (ORLY 2.34%), two of Autozone's main competitors.
Advance Auto has grown revenues, earnings, and earnings per share at a rate of 5.6%, 7.6%, and 12.4%, respectively, per year over the last ten fiscal years. It is important to see that Autozone is keeping up with revenue growth and not losing market share to others.
O'Reilly has grown their revenues, earnings, and earnings per share by 14.2%, 16.6%, and 16.4%, respectively, per year over the last ten years. O'Reilly has been more of the growth story, which probably explains their high price to earnings ratio of over 25.
Autozone still trumps both of these companies in efficiency though, as Advance Auto and O'Reilly have averaged profit margins over the last ten years of 5.5% and 7.9% respectively, along with return on assets of 9.3% and 9.2%, respectively.
Current valuation
Autozone is currently being priced in the market at 18.8 times their trailing twelve months earnings, and 14.9 times their forward earnings. This compares favorably to Advance Auto's price of 22.7 times trailing earnings and O'Reilly's 26.6 times earnings.
Bottom line
Autozone is running a stable business and management seems incredibly focused on adding long-term value for shareholders. Over the last five years they have opened net 800 stores bringing their total to 5,200 (2013 10-K, pg8) and bought back over $6.4 billion worth of their own stock. Share buybacks are one of investors' best friends, any time a management team can utilize buybacks in a responsible manner, we should be ecstatic.
I urge you not to take one look at a stock priced over $500 a share and assume it is too expensive. Think of it as buying a piece of an excellent company with outstanding management. An investment in this company should reward a long-term investor very handsomely.
