AutoZone (ticker symbol: AZO) is the second largest retailer of aftermarket automotive parts and accessories next to Advance Auto Parts. It has over 5,000 store locations spread across the United States, Mexico, and Brazil. Since its founding in 1979 and listing on the New York Stock Exchange (NYSE) in 1991, it has grown from strength to strength, but is AutoZone stock undervalued or overvalued, a buy or a sell?
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AutoZone Stock Price & Valuation
By comparing AZO stock price to its intrinsic value, or fair value, you can calculate how much potential for upside or downside movement in share price exists.
Casual investors will often look no further than AZO stock price to make a buy or sell decision on the automotive parts retailer. Beginner investors sometimes assume that a high share price means a stock is overvalued and a low share price signals it is undervalued, but more insight is needed to make those assessments.
While the company’s share price when compared with its fair value is important when determining whether it is undervalued or overvalued, the share price alone doesn’t provide insight into the company’s valuation.
Wall Street analysts will generally build a discounted cash flow (DCF) model to calculate the valuation of a company. Building an Autozone DCF model would be a valuable and educational pursuit, but it is also time-consuming. After all, a professional research analyst may spend up to a week building such a valuation model.
Below, we provide a quick snapshot of Autozone’s valuation based on the following valuation models:
- 5 Year & 10 Year DCF Growth Exit
- 5 Year & 10 Year DCF EBITDA Exit
- 5 Year & 10 Year DCF Revenue Exit
- P/E Multiples
- EBITDA Multiples
- Earnings Power Value
The estimated share price using each of these models is calculated. Price targets from Wall Street analysts and the current AZO share price are also displayed.
AutoZone Stock Price History
The Autozone stock price history reveals a volatile stock which has the potential to rise and fall substantially over comparatively short time periods.
A 10 Year Stock Price history chart for Autozone conveys valuable information on the share price range over time, so you can better gauge whether its volatility is appropriate for your financial circumstances.
It is clear that AZO stock price moves a lot in any given year let alone from one year to the next. If 20%+ swings in share price would cause you to fret or not sleep at night than perhaps a company with a less volatile share price might be a better fit, or you could consider lowering the risk using options strategies, such as the covered call.
A short-term, 1 year Autozone stock chart doesn’t provide as broad insights as long term 10 Year stock charts, but the short-term stock chart is valuable to view recent share price movements.
AutoZone Revenues & Earnings
The growth of AutoZone revenues is a key indicator that informs investors about the likely profitability of the company in the future. When revenue growth slows, profitability is likely to stabilize or slow too, and investors tend to apply lower multiples to these companies, which can hurt share price performance.
For any company, the goal is to maximize shareholder value, and the best way to achieve that aim is to boost profitability. A company that can increase revenues without its costs rising commensurately will generally experience rising profits over time. Analysts predict future earnings and apply multiples to those earnings when calculating what a company is worth. For AutoZone, you can see its Total Historical Revenues in the summary graphic below:
The earnings projections for AutoZone are a key performance indicator for investors to focus on. Investors should observe whether earnings are projected to rise. The faster the pace at which they rise, the more likely it is that the earnings multiple will be higher. And higher multiples translates to higher share prices.
AutoZone P/E Ratio
The price-earnings ratio (p/e ratio) is a valuation metric that compares the current price of a company to its per-share earnings. It is frequently labeled the price multiple or earnings multiple.
A blue chip company that has been around for decades may trade at a lower P/E multiple of say 10, suggesting that its current share price is 10x its per-share earnings.
A fast growing company with global reach potential will often be rewarded by shareholders with a high Price/Earnings multiple, or P/E ratio.
A new technology company that is not generating much in profits may have a high multiple because it has the potential to earn large profits in the future. It’s not unusual for a fast-growing, publicly traded technology company to have a P/E ratio as high as 100, meaning its share price trades at 100 times each dollar of its earnings.
A simple way to think about the P/E ratio of 100 is if you paid $100 for one share of stock, you would expect to get $1 back in earnings at the end of the year. In practice, many fast growing companies don’t issue dividends and pay you back that dollar of earnings (they reinvest it), but the concept is helpful in conveying the premium you are paying for a high earnings multiple.
The AutoZone P/E ratio, and the Price/Earnings multiples of its peers are displayed below:
AutoZone Return On Invested Capital (ROIC)
The AutoZone ROIC figure measures the profitability and value-creating potential of the company after taking into consideration the amount of capital invested.
AZO ROIC might sound like alphabet soup, but ROIC is perhaps the most important metric any value investor should pay heed to when analyzing any company. ROIC is short for return on invested capital, and is calculated by dividing the after-tax operating income by the book value of both debt and equity capital minus cash and cash equivalents.
If that sounds like a lot of gobbledegook, think of ROIC simply as the value-creating potential the company has after taking into account the amount of initial capital invested.
Historically, AutoZone’s ROIC has been highly competitive compared to its rivals:
AutoZone Debt To Total Capital
Excessive debt can hurt a company’s financial performance or boost returns over the long-term depending on how efficiently the borrowed capital is invested. A company with some debt is often viewed favorably by stock analysts while excessive debt levels can be a cause for concern that any operational mis-step or change in market size or competitive positioning could hurt the company.
A company saddled with a heavy debt burden is no less precariously perched financially than an individual who has borrowed too much. If the costs of taking on debt exceed the benefits, a company will eventually experience falling financial metrics, and share price declines will likely soon follow.
However, a company taking on debt differs greatly from an individual assuming a debt burden because the company uses the debt to ultimately grow revenues whereas an individual typically takes on debt in order to acquire a non-revenue generating asset.
If a company can borrow at a certain interest rate and invest the cash it receives to produce a higher return than it pays in interest charges then borrowing the money may well be a smart financial maneuver.
AutoZone debt levels compared to peers have historically been lower, but higher than its primary competitor, Advance Auto Parts (AAP).
Companies use a formula called the we the weighted average cost of capital, or WACC, to calculate the average cost of raising capital from its security holders to finance its assets.
Shareholders expect a return on their investments, banks require repayment of loans, and bondholders expect to earn a yield too from interest payments. The WACC takes account of the requirements of all these security holders.
The WACC is a very key metric used by companies to assess the overall required return for a firm. To grasp what WACC means intuitively, imagine a company that was financed equally by debt and equity holders:
Let’s imagine the company required $1,000 to operate and borrowed $500 from lenders and took $500 from shareholders.
If the lenders require a 10% return on their money and the shareholders require a 20% return on their money, then the WACC would be 15%, meaning the company would have to produce a 15% return to satisfy debt and equity holders.
For AutoZone, the weighted average cost of capital is shown below:
Below you can see an example of AutoZone financials and a 5 year DCF Revenue Exit model:
The author has no position in any stocks mentioned. Investormint does not own or recommend any stocks.
Have you bought or sold AutoZone stock? How did it work out for you? Share your experiences in the comments below – we would love to hear from you.
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