Why AutoZone Stock Could Be Your Next Top Performer

Key Points

• AutoZone stock is relatively flat after quarterly earnings results, compressed by a weaker consumer sentiment reading.
• Management expects to see more business ahead as they open more stores and buy back more stock.
• Even Wall Street analysts have noticed the current trends in the automotive industry can benefit these businesses. Bearish traders left AutoZone alone.

When companies announce their quarterly earnings results, they can often get sucked into the market's price action for that day, especially if other news or economic data come in to trump the importance of the quarterly release for that stock. That is the case today with shares of AutoZone Inc. NYSE: AZO, as the company reported its latest quarterly results on a day when U.S. consumer confidence readings fell the most in three years.

This is bearish for the broader S&P 500, despite whatever positive news or developments might have helped AutoZone stock's potential upside and valuation. However, investors today can take a second look inside the company's quarterly release to realize this could be a safer stock during the new business cycle than most had thought.

The trend becomes especially clear when AutoZone is compared to competitors like Advance Auto Parts Inc. NYSE: AAP and O'Reilly Automotive Inc. NASDAQ: ORLY. Before investors dig deeper into the factors making AutoZone stock a potentially better pick against peers, they need to understand what is happening industry-wide to help meet the demand for vehicle parts and maintenance in the coming months.

Unpacking the Trends: What’s Really Happening in the Car Industry and Among Consumers?

As inflation took a significant amount of buying power out of consumers' hands, credit card balances rose, bringing delinquency rates along with them. The thing is, late payments didn’t stop at the credit card level; car notes were next.

According to a study, car repossessions have increased in the past 12 months by up to 23%. Considering this negative trend, investors can assume that the new car market is suffering as much (if not more). If the market is going to be focused on the used vehicle market instead, it makes sense that parts and maintenance demand may be on the rise.

The market understands this trend is going to happen, which is why they have bid up the price of AutoZone stock to 92% of its 52-week high, along with O’Reilly’s 96% level. This environment, however, seems to favor the large-cap automotive stocks, as Advance Auto Parts stock is down to 46% of its 52-week high, being the smallest of the group.

It could be due to the ability to scale and manage inventory more easily, making it easier to adjust for demand, but the fact remains that O’Reilly and AutoZone could benefit the most from this new trend. The question now becomes which of the two makes for a better pick in the coming quarters.

Markets Favor AutoZone Following Its Strong Recent Quarter

AutoZone management realizes that the trend favoring its business could be just getting started. That's why investors will notice in the quarterly press release that up to a million shares were bought back from the open marketplace.

Stock buybacks typically mean management believes the stock is cheap enough to buy and that the coming months might carry more upside than potential risks in the instrument. But that wasn’t the only hint management gave markets about the future of AutoZone’s business.

Over the past 12 months, AutoZone opened as many as 117 new stores across the United States, Mexico, and Brazil. This compares to the net 96 new stores opened during the same period last year, a sign of increasing demand expectations in the coming months.

Management isn’t the only one with high expectations from AutoZone, though. Even bearish traders decided to stay away from the company, as the stock’s short interest declined by as much as 6.5% over the past month to show bearish capitulation.

On the other hand, short interest for O’Reilly rose during the month by an aggressive 19.5%. This makes it clear that AutoZone has the better sentiment from both management and traders. Wall Street analysts would also agree that AutoZone stock is the potential winner.

A consensus price target of $1,144 a share would only call for a 1.7% upside in O’Reilly stock. Analysts at Evercore now see a valuation of up to $3,350 for AutoZone stock, calling for a much more attractive upside of 11% from where the stock trades today.

More than that, up to $8.5 billion of institutional capital made its way into AutoZone stock, with Marshfield Associates leading the way with a 0.2% boost in holdings as of August 2024. This may not seem like much on a percentage basis, but it did bring their net investment up to $500.3 million today, or nearly 1% ownership in the company.