AutoZone: Mega Hubs, DIFM, And Worldwide Growth (NYSE:AZO)


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AutoZone Funding Thesis

I final lined AutoZone (NYSE:AZO), a best-in-breed auto elements retailer, in Might of 2021, and since then the inventory has carried out even higher than I predicted, up over 35%. This isn’t with out warrant, as the corporate handily beat each income and EPS expectations within the following quarters. Moreover, enlargement into Latin America, progress in DIFM, and additional improvement of mega hubs, will allow accelerated top-line progress. AutoZone’s free money flows additionally stay robust, supporting an aggressive buyback program. Accordingly, I’ve raised my price-target on the inventory to $2,600/share.

What’s occurred since Might

I printed my final article on AutoZone on Might 17, 2021, and within the following three reported quarters the corporate has carried out admirably. Persevering with a formidable string of beats, AZO beat on the top-line by ~20% every quarter, and revenues by ~8% every quarter.

In line with Searching for Alpha, this resulted in 16 upward EPS revisions by analysts and 0 downward, which bodes nicely for the longer term.

Free money flows have additionally continued to develop, as much as $3bn within the TTM, up 3.71% over the prior 12 months (understand that AZO has solely reported Q1 so far).

Firm progress initiatives

In quarterly convention calls, administration at AutoZone has repeatedly laid out two main progress initiatives: enlargement into Latin America, progress in do-it-for-me (DIFM), and the expansion of so-called mega hubs.

Growth into Latin America

The chief driver of progress for AutoZone in Brazil and Mexico can be a rise in retailer rely. The market in these two international locations is way from saturated, and a few simple arithmetic can assist reveal what AZO’s footprint can finally appear to be there. Per my estimates, the variety of AutoZone shops within the USA is about 1 per 55,000 folks. In Brazil and Mexico, it is nearer to 1 in 480,000. Even accounting for the decrease variety of the vehicles per particular person in these two nations versus the USA, you continue to attain a possible market measurement of about 2,000 shops. At $1.85mn in common income per AutoZone retailer, Latin America might finally contribute $3.7bn to AZO’s top-line.

DIFM

Whereas AutoZone is thought for being the go-to place for do-it-yourself (DIY) repairs, they’ve grow to be a drive to be reckoned with within the DIFM area as nicely. For these questioning, the distinction between DIY and DIFM is that DIY is particular person customers, whereas DIFM is geared in direction of restore outlets.

In the newest quarter, AutoZone reported that DIFM grew 29.4% on a YoY foundation, and a whopping 41% on a two-year stack foundation to $900mn, or 25% of complete gross sales. That is unimaginable progress and is powered by what administration calls a “extremely fragmented portion of the market.” AutoZone is consolidating this area and I absolutely anticipate progress to proceed on this section.

Mega hubs

AutoZone separates their shops into three teams: satellite tv for pc shops, hubs, and mega hubs. Historically, AutoZone centered on satellite tv for pc shops (they carry ~20,000 SKUs). They’re now emphasizing hubs and mega hubs as they’re extra environment friendly and drive larger gross sales, providing a wider choice (4x greater than satellite tv for pc shops). CFO Jamere Jackson mentioned it finest on the Q1 2022 convention name:

As a reminder, our mega hubs usually carry roughly 100,000 SKUs and drive great gross sales carry inside the shop field in addition to function a achievement supply for different shops. The enlargement of protection and elements availability continues to ship a significant gross sales carry to each our business and DIY companies. And we’re testing better density of mega hubs to drive even stronger gross sales outcomes.

AutoZone at the moment has 62 mega hubs, with plans to extend that quantity to 88 by the tip of their fiscal 12 months (AZO’s fiscal 12 months ends August twenty eighth). I anticipate this may assist drive AutoZone’s income progress above their historic vary of 2-5% top-line progress and analyst expectations.

Share buyback program remains to be going robust

As I highlighted in my final article on AZO, AutoZone’s share repurchase program has enormously boosted shareholder worth. This technique has continued, with AutoZone saying two $1.5bn will increase to the share repurchase authorization (equal to six.9% of shares), bringing the whole quantity approved for repurchase since going public to $29.2bn.

I anticipate this buyback program to proceed at a >$3bn annual tempo, as administration has given no indication of slowing down, and incremental leverage may be taken on as nicely to additional enhance buybacks past simply the free money stream that’s generated.

Supply: Creator’s personal work with some knowledge sourced from Tradingview

Valuation

I will take a look at AutoZone’s valuation 3 ways: relative, on a DCF foundation, and on a reverse DCF foundation.

Relative

On a relative foundation, AutoZone seems modestly undervalued, at 15.8x EV/FCF, in comparison with the upper-teen numbers for his or her closest friends aside from Advance Auto Components (AAP).

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Knowledge by YCharts

Evaluating worth and progress through the worth to earnings progress (PEG) ratio additionally makes AutoZone look enticing at 0.587x; that is decrease than all friends apart from Superior Auto Half.

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Knowledge by YCharts

Discounted Money Move Mannequin

In my mannequin, I assume annual free money stream progress within the 6% vary, pushed by the aforementioned elements. Discounting these money flows again at AZO’s weighted common value of capital (5.33%), I discover that the current worth of their future free money flows by 2026 is $14.28 billion. I selected a terminal a number of of 15x 2026 FCF and add that to the sum of the money flows. After subtracting web long-term debt, I attain an intrinsic worth of $54bn, or ~$2,600/share. That is 24% above the present share worth.

Reverse DCF

Utilizing the identical low cost fee and terminal a number of assumptions within the DCF, it seems as if the market is pricing in -0.5% progress over the following 5 years from TTM free money stream of $3.0bn.

I extremely doubt that AutoZone won’t develop earnings in any respect for the following 5 years, and this implies that there might be upside within the coming months.

Supply: Creator’s personal work with some knowledge sourced from Macrotrends

Dangers

The primary danger dealing with AutoZone, electrification, hasn’t advanced a lot since my final article. The approaching of straightforward, electrical, vehicles remains to be a query mark for AutoZone, as EVs have a fraction of the shifting elements of an ICE car. Nevertheless, I consider that EVs won’t have a significant impression on AutoZone for the following decade on the earliest, as they nonetheless should not have mass adoption.

Takeaway

In abstract, AutoZone is a best-in-breed auto elements provider with important tailwinds at its again, which ought to bolster its income progress above the historic vary and beat analyst expectations. Regardless of the large runup these shares have seen over the previous twelve months, I would not be afraid to take a starter place on this compounder.



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