Autozone Beat Consensus, Does That Make It A Buy? (AZO)

It’s Not Consensus That Matters

Autozone (AZO) made headlines this morning after it reported consensus-beating results for the calendar 1st quarter. While a consensus beat is a great thing, it does not make a stock a buy, especially if the outlook for future growth is in peril. In the case of Autozone, there is an outlook for growth that may in fact make this stock a buy.

Autozone is one of if not the U.S. leading retailer of aftermarket auto parts, vehicle maintenance products, and supplies for motorists. In that regard, the company’s business was well-supported before the pandemic due to secular trends. Trends like the rising cost of new cars and the shift to pre-owned vehicles and longer ownership periods. The average lifespan of a car in 2007 was 10 years, in 2019 it was 11.8 years. Post-pandemic the company has proven to be a nimble operator and a vital part of American lives.

The Results Are In

Autozone reported what it describes as a quarter with three distinct periods. The first four weeks, before the pandemic panic set in, the company was performing above expectations with solid mid-single-digit sales increases. The second four weeks, the four weeks in which shut-downs most impact the economy, sales were down significantly.

In the final four weeks, the four weeks in which stimulus checks began to flow through the economy, comps turned “meaningfully positive”. The bottom line, comps for the quarter are down 1.0% and well below the -6% that many analysts had been expecting. Revenue, down -0.1% from the previous year, beat consensus by 500 basis points.

One reason for Autozone’s strength is that as an “essential business”, it was able to keep virtually 100% of its stores open. While the company did reduce hours and implement social-distancing measures the reduced store traffic was offset by eCommerce and a strong rebound. Margins, notably, held steady in the YOY comparison despite increased costs associated with the pandemic. Store inventory is up too, about 2.5%, due to the opening of new stores and increased product placement on store shelves.

Guidance Is Shaky But The Outlook Is Bullish

Company guidance for the next quarter and full-year was not forthcoming due to pandemic-related volatility in business.

“During the third quarter, we experienced the most extreme fluctuations in sales, both negative and positive, in the Company’s more than 40-year history. Because of this extreme volatility and uncertainty around the continued effects of the virus and government and consumer responses, it is difficult for us to forecast short-term results with any degree of confidence,” said Bill Rhodes, Chairman, and CEO.

Despite the outlook is bullish. The pandemic provided volatility for the business but did not hamper results in a material way. Looking forward, the company is still on track to deliver revenue and EPS growth this year and next. The average analysts rating is a buy with one caveat, the stock is trading at the consensus target which suggests it is already fairly valued. In favor of the bulls, however, is the fact eleven of the 24 ratings are neutral which means there is a chance for analysts upgrades over the coming quarters.

In addition, the company still has nearly $800 million left in its share-repurchase program. The program has been suspended temporarily due to the pandemic but will likely be reinstated later this year. The company’s cash position, strong balance sheet, results, and outlook all support it.

The Technical Outlook: Bullish … But

The technical outlook for Autozone is bullish but it comes with a but. While the outlook is bullish price action is already elevated and showing signs of resistance that should not be ignored. Today’s pop set a new high for the stock, above the pre-correction levels, and that is a very bullish sign. The bearish twist is that sellers chose to step in be it for profit-taking or position-management and that may keep prices from moving higher in the near to short-term.

What makes the charts even less appealing are divergences in MACD and stochastic. Both indicators are bullish but show lower peaks while price action makes a higher peak and that’s not good. Divergences show underlying weakness in the market that could lead prices lower, possibly much lower. If price action isn’t able to hold current levels the next targets for support are near $1,120, $1,100, and $1,050 any of which could become an entry point.

If price action is able to hold this level, near $1145, it will likely become the starting point for another rally. A rally whose target is a retest (at least) of the all-time high