On Tuesday, auto parts retailer AutoZone
The latest quarter was indicative of the company's financial results over the last several years: modest growth from operations, with a bottom-line kicker as a result of share buybacks.
AutoZone's fourth-quarter sales advanced 3%, while full-year sales grew a slightly higher 4.2%. Net income grew almost 3% for the quarter, but was about flat for the full year. However, because of share repurchases, diluted per-share earnings grew almost 10% for the quarter and nearly 5% for the year.
Fellow Fool Dave Meier can walk you through the rest of the annual data in his Fool by Numbers, but overall, AutoZone doesn't excite me. Sure, the company generates large amounts of cash flow, but its core business doesn't appear capable of growing in the double digits.
Many Fools know that we believe that a company's intrinsic value can be determined by projecting out its free cash flow and discounting that back to its present value via a discounted cash flow (DCF) model. I'll concede that AutoZone reports impressive cash flow, but what is also important is the projected growth in that cash flow. I'll analyze the present and the future via a concept called free cash flow total return, which involves calculating a free cash flow yield -- price divided by free cash flow -- and also estimate what the growth in free cash flow may be.
Using Meier's 2006 free cash flow number for AutoZone, I come up with about $7.35 in free cash flow per share. Dividing that by the current stock price of $98.67 gets me to a free cash flow yield of nearly 7.5%. That's a very solid number, but again, the expected growth in that free cash flow is what bothers me. Free cash jumped considerably from 2005 but had been on a negative trend for at least the previous three years. And I don't expect it to be very high going forward because the core business is not expanding that rapidly.
As a potential investor, that leaves me stuck between a rock and a hard place. AutoZone's valuation is very reasonable, as is its cash generation, but share repurchases can only take a company so far. Are there really no other good opportunities for investing the cash? And what about incremental increases in the dividend? Yes, it's not always the best way to return cash to shareholders, but it does put cold hard cash into investors' pockets.
AutoZone has a reputation as the best retailer in the industry, with peers that include Advance Auto Parts
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.