We came across a bullish thesis on AutoZone, Inc. (AZO) on Long-term Investing’s Substack by Sanjiv. In this article we will summarize the bulls’ thesis on AZO. AutoZone, Inc. (AZO) share was trading at $3040.09 as of Sept 19th.
An engineer at a workbench surrounded by automotive parts, tools, and microchips.
AutoZone, Inc. (AZO) is a leading U.S. retailer and distributor of automotive replacement parts and accessories, primarily serving the do-it-yourself (DIY) market, while also catering to professional auto repair shops (Do-It-For-Me or DIFM). Established in 1979, the company now operates over 7,236 stores worldwide, with a strong presence in the U.S., Mexico, and Brazil. The business has consistently expanded, adding about 190 new stores annually, including during challenging periods like the pandemic. AZO’s revenue is largely derived from failure demand products (47%), maintenance goods (34%), and discretionary items (14%), with steady growth in both DIY and DIFM segments.
AZO is a dominant player in the DIY market, holding an 18% market share, outpacing competitors like O’Reilly (15%) and Advance Auto Parts (8%). Despite holding only a 2.5% share of the commercial market, AZO sees significant room for growth, especially as it continues to target auto repair shops with rapid parts delivery services through its network of hub stores. The company has also seen notable success in its commercial sales, which have grown at a compound annual growth rate (CAGR) of 13% since 2008, contributing to a total revenue CAGR of 5.5% during the same period. This commercial segment now accounts for 25% of total revenue.
Financially, AZO is strong, reporting $18 billion in annual revenue in 2023, with consistent operating profit growth at a 7.6% CAGR and free cash flow growing at an 8% CAGR over the last decade. The company has a solid track record of returning value to shareholders through share buybacks, having spent $24 billion in the past decade, resulting in a 6.3% CAGR decline in shares outstanding and a 17% CAGR in earnings per share (EPS). AZO’s capital allocation strategy is focused on reinvestment and buybacks, without paying dividends, which has contributed to a high return on invested capital (ROIC) of 30%.
AZO’s competitive advantages lie in its scale, extensive distribution network, and strong private label offerings, with over 50% of revenue coming from in-house brands like Duralast. While e-commerce poses a potential threat, particularly in maintenance categories, AZO’s in-store availability and urgent repair services give it a competitive edge. As the company continues to expand, both domestically and internationally, it remains well-positioned for future growth despite challenges such as electric vehicle (EV) adoption and potential sales slowdowns. Analysts predict potential annual returns of 13%-20%, driven by strong capital allocation, stable margins, and an expanding commercial footprint.
AutoZone, Inc. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 45 hedge fund portfolios held AZO at the end of the second quarter which was 48 in the previous quarter. While we acknowledge the risk and potential of AZO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AZO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.