Wednesday, April 1, 2009

Marcial: AutoZone Is in the Fast Lane

Marcial: AutoZone Is in the Fast Lane

The Obama Administration's efforts to rescue General Motors (GM) and the U.S. auto industry haven't cooled the mounting concern over their uncertain future. So shares of carmakers and auto parts and accessories companies continue to stagger. One bright spot has been the retailers that sell auto parts—and services—directly to the public. Investors have taken a particular shine to AutoZone (AZO), the largest automotive replacement parts retailer, which is bucking the market trend.

AutoZone's stock chart looks like it is in a bull market of its own, especially when you plot it against the besieged shares of auto titans GM and Ford Motor (F), and the various auto parts makers. AutoZone closed Mar. 31 at 162.62 a share, close to its 52-week high of 166.42 reached two days earlier.

The strength of AutoZone's fundamentals is one of the reasons the stock has been charging up. The company's results in its fiscal 2009 second quarter, reported on Mar. 3, attest to such vigor: Earnings climbed 21%, to $2.03 a share, beating analysts' forecasts. Total sales in the quarter jumped 8%, to $1.45 billion.

Consumers Keeping Cars Longer

AutoZone has benefited from tough economic times, which fueled the collapse of the new-car market and drove many car dealers out of business. Those factors have pushed up demand for auto parts and accessories for used cars. As consumers tighten their budgets, they've been extending the use of their cars and delaying plans to buy new ones. As a result, the median age of vehicles on the road has extended to more than seven years, from about five in 2003. And the decline in gasoline prices has led to increased driving, thus steering more customers into AutoZone stores, which sell a wide assortment of replacement hard parts, maintenance items, and accessories.

AutoZone targets retail customers in the $40 billion U.S. do-it-yourself market, which accounts for 83% of its revenues, as well as the commercial repair shops in the $56 billion "do it for me" business (11% of sales). The remaining 6% of revenues is largely from sales in Mexico.

"AutoZone shares have surged as investors recognize these favorable fundamentals," says Craig Kennison, auto industry analyst at investment firm Robert W. Baird, who rates the stock outperform. Based on his earnings outlook for AutoZone, he figures the stock in a year could trade as high as 190 a share, or 16 times his 2009 earnings estimate of $11.36 a share, and as low as 140, or 12 times the estimate. For 2010, Kennison expects earnings of $12.49 a share. (Robert W. Baird expects to do business with AutoZone.)

Benefiting from Closing Dealerships

Its continued success has driven AutoZone to spend part of its significant cash flow on expanding the number of its stores every year, aimed at further boosting its 13% share of the U.S. market. In 2008, AutoZone opened 160 new U.S. stores. In Mexico, it opened 25. So far this fiscal year, the company has opened 50 new stores in the U.S. and 10 in Mexico.

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