Stock of the Day - March 19, 2009 - AZO

AutoZone (AZO)

AutoZone (AZO) is a specialty retailer of automotive parts and accessories that aims its goods at do-it-yourself customers. The company provides products for consumers to replace or fix broken parts of cars, trucks, and other vehicles. AZO is a very interesting stock that has seen a lot of positive action in the past few months.

The downfall of car manufacturers like General Motors (GM) and Ford (F) has been the catalyst for AutoZone’s growth. People can’t afford to buy new cars, so they’re driving their current cars for a longer amount of time. The older the car, the more repairs and parts are needed to maintain it. In this sense, the recession and economic instability we’re currently witnessing has been beneficial for AutoZone!

Indeed, the company reported fiscal second quarter earnings that blasted through analysts’ expectations. The quarter ending February 14 saw an 8.6% increase in net income and 21.1% increase in earnings per share. The large jump in earnings per share came after the company bought back roughly $375 million worth of its stock.

Investors rewarded the company’s ability to outlast recessionary conditions by buying AZO and driving the stock price upward. AutoZone skyrocketed to its current price of $162.31 after hitting its 52-week low of $84.66 in November. Due to popular sentiment, the stock has potential to keep rising, but I believe that we will soon see AZO drop in price.

My main concern for AutoZone is the large amount of debt that the company is carrying. AZO is currently lugging over $2.2 billion in debt with a very low amount of stockholder equity: it has a high debt/equity ratio at .378. This means that the company has borrowed a lot of money and doesn’t have a comparable amount of growth potential and backing to match its debt. In the financially crippled environment we’re facing, large amounts of debt are far from desirable.

It’s also important to note that AutoZone is a retailer. The retail sector has taken an absolute beating during the economic downturn. AZO should be grouped with discount retailers like Wal Mart (WMT) and Family Dollar (FDO). AutoZone provides secondary products that most customers only buy if they can’t afford to have a mechanic do work for them. Even though discount retailers have been faring better than regular or premium retailers, the entire group is still suffering.

We must also consider the massive rally that AZO has already made. Unfortunately, if you don’t already own the stock, you’ve probably missed the jump on this one. I think that the company is overvalued at its current price. When all the information surrounding AutoZone is boiled down, we’re left with a retail company that is carrying a lot of debt. Even though the company’s stock may increase in the short term, it won’t be able to sustain its current price in the long run. I would even consider selling AutoZone short at these levels.

 

-Matt Schwartz

College Trillionaire