AutoZone Beats Estimates Again, Price Target Raised

AutoZone NYSE: AZO was a pandemic winner. Despite many Americans not driving nearly as much as they were accustomed to, the company continues to deliver solid numbers. The double beat on March 1 is becoming yawn-inducing. The company has beat on revenue for eight straight quarters. And in terms of earnings per share (EPS), the streak is now 12 straight quarters.

Yet after getting a bump, the day earnings were released, AZO stock has retreated and it’s fair to wonder why. Some of it may be a little profit-taking. And in fairness, the jump on Monday may have been part of the “vaccine rally” that overtook Wall Street.

Some analysts may also be wagging their finger at the auto parts retailer confirmed it bought back $900 million in shares in the quarter. It has been the opinion that AutoZone has prioritized stock buybacks over the health of its balance sheet.

However, CFO Jermane Jackson, expressed confidence in the company’s strategy. As he explained, “…if we have concerns about the near term, we will simply temporarily suspend repurchases again. But we feel comfortable with our strategy and our execution.” Jackson also said the company plans to continue reducing its cash and cash equivalents for the remainder of the fiscal year.

It’s All About the Recovery

Your feelings about buying AutoZone may reveal your sentiment about the economic recovery. On March 2, Texas and Mississippi joined Florida in removing all existing Covid-19 mandates. With the vaccine rollout continuing and virus cases on the decline, economists continue to talk about a strong economic recovery fueled by pent-up demand from consumers.

It’s logical to believe that Americans are ready to travel. And while gas prices are increasing throughout the country, that probably won’t be a deterrent in the short term. Those that can travel have built up savings and paid down credit card debt. They are ready to roll.

But is their car? If you’re making an investment in AutoZone, you’re betting that people will need to get work done on their car. Whether that work is done at home or at a mechanic, AutoZone can provide the parts. Plus even if individuals aren’t planning a long road trip, the fact that they will be adding miles to their car at a more normal rate will be a catalyst.

And AutoZone has developed an e-commerce presence which will be important going forward regardless of the pandemic. Some behaviors will have shifted permanently.

The Flight to the Suburbs Means People Are Buying Cars Again

One consequence of the urban flight resulting from the pandemic is that people who were used to ride-hailing and public transportation to get around now need cars. Used car sales have remained strong during the pandemic. Since remote work is likely to remain in place to some degree, the impact of this may not be as severe, but it still has increased the addressable market for AutoZone and its competitors.

What Could Pull the Plug on An AZO Stock Rally?

The trend towards electric vehicles (EVs) is a long-term headwind for AutoZone and other car parts retailers. Simply put, EV engines have fewer replacement parts than their internal combustion counterparts. Over the lifetime of a car, that means lower sales.

And further out, if our country does make autonomous driving a reality, which will put even more pressure on a company like AutoZone.

To be fair, this isn’t a reality today. EVs still make up only a small fraction of overall sales. Autonomous driving is at least five years away and probably closer to 10 say many experts. But the Biden administration is putting its full weight behind this fundamental shift. That’s a trend that shouldn’t be ignored.

Analysts Say AutoZone Stock Is a Buy, Should You?

21 analysts have issued ratings for AZO stock. The consensus 12-month price target of $1,329.75 would be an approximate 13% gain from current levels. However, some analysts give the stock a much higher target of $1,500.

In the short term, if you can stomach the price of the stock and the fact that if pays no dividend, then it looks like a reasonable buy-on-the-dip candidate. However, as a long-term addition to your portfolio, I might try to find other stocks that provide greater value.