Autozone Is Breaking Out, Double-Digit Gains Are In Sight

Autozone Sets New All-Time High After Smash Earnings

Autozone (AZO) is not a cheap stock. Trading near $1250 per share it is one of the pricier issues you will find on the market today. When it comes to value though, value is where you find it and Autozone has value. That’s why it’s breaking out to a new all-time high.

This Is Why Autozone Is Breaking Out

Autozone is breaking out because management is delivering steady, consensus-beating revenue and EPS growth. Today’s rally was sparked by the FQ1 earnings report and the $0.56 per share beat for GAAP EPS. The company reported revenue of $2.79 billion or up 5.7% YOY and GAAP EPS of $14.70%. Consensus figures were $2.77 billion for revenue and EPS of $13.74.

Bill Rhodes, Chairman, President, and Chief Executive Officer said this in the 1Q earnings report press release

“Our business strengthened during the quarter with accelerated growth in both Retail and Commercial. The hard work of our AutoZoners and their dedication to providing superior customer service again drove our strong quarterly performance. As our industry’s fundamentals remain healthy, we are optimistic about what we can accomplish this new year, with our ongoing initiatives in place to improve inventory availability, drive DIY sales, and continue to grow Commercial …”

The strength was driven by a consensus-beating increase in comp-store sales. Comp-sales in the U.S. increased by 3.4% beating consensus by 0.8% and proving management’s strategy is sound. Part of that strategy is an increase in in-store inventory that includes more shelf items and reserve stock.

Gross-profit as a percent of revenue remained steady over the quarter as improvements in operations were offset by increased compensation costs. Operating expenses increased by 60 basis points primarily attributable to labor. The good news is two-fold. First, Autozone’s issues with labor costs are minimal and more than offset by growth and efficiencies the company has realized.

Second, Autozone’s increase in labor costs is evidence of the current trend within the labor market. Labor markets are tight, competition for quality employees is tough, and wages are rising because of it. While tight labor markets mean higher costs for employers, they also mean Autozone’s customers have jobs and money to take care of their vehicles.

Buy-Backs Will Boost Capital Gains

Autozone is an active repurchaser of its own stock. The company has spent more than $23.2 billion on repurchased since the inception of the program thirty years ago. Over the last quarter, the company bought back 403,000 shares for $450 million. The average price was $1116, or just above the current level of the 30-day EMA. With the recent addition, $1.25 billion, the repurchase authorization has $1.30 billion left in the coffers.

The Technical Outlook Is Bullish

On a technical basis, the break-out has been building for some time. Shares of Autozone formed a Bullish Flag on the weekly charts that signal is confirmed. In terms of forecast, the Bullish Flag signal indicates the continuation of a trend that could double the gains Autozone has posted over the last two years.

The rally leading up to the Bullish Flag is equal to $600, projecting that $600 from today’s break out point creates a valid technical target. That target puts AZO near $1800, a 50% gain from Monday’s closing price. The caveat is time. It took shares of Autozone two years to move up to $1200, it could take another two for the next leg of the rally to run its course.

Such a move makes sense on a valuation basis as well. Autozone is delivering steady growth and yet trades at the lowest multiple of its group. At 17.6X forward earnings, AZO’s closest comparison is Genuine Parts Company, it’s trading near 18.5X forward earnings. O’Reilly Autoparts, the group leader, is trading closer to 24.5X times its 2020 EPS estimate. In this light, AZO could advance as much as 40% to $1740.