Auto Sales Plunging: Will AutoZone Benefit?

The U.S. auto industry is currently enduring one of the worst business climates in its history, as the tapped-out consumer retrenches. General Motors (GM) reported that October was its worst sales month in the post-World War II era. GM’s sales were hit the hardest, dropping 45%. Chrysler and Ford (F) fared little better as their sales fell 35% and 30%, respectively. The credit crisis can be blamed for a portion of the auto industry’s distress, as financing for auto loans has dried up for all but the most qualified buyers. Compounding the problem, many consumers are in no position to take on additional debt for a new car in the midst of a recession. So, with an aging fleet of vehicles motoring across the country, we think it is reasonable to assume that auto parts retailers such as AutoZone (AZO) will see increased sales as a result.

This week, Ockham Research downgraded AutoZone to Undervalued from Greatly Undervalued. There has been quite a bit of news in this stock that prompted our ratings change. First, AutoZone reported earnings at the end of September that showed rising sales and earnings. However, same-store sales were a slight disappointment, gaining only .6%. The stock dipped over the next few weeks but some of that drop can be attributed to the overall bear market in October. Still, AZO’s results are starting to reflect our belief that auto parts retailers should increase sales as the nation’s auto fleet ages. Our analysis shows that during the last week, AutoZone cash earnings estimates have improved by 12% but the stock price advanced a whopping 24% during the same period. The price shot up last week at a pace that exceeds what we believe the fundamentals justify, which necessitates our downgrade. However, we remain positive on the stock overall.


AutoZone is the largest U.S. retailer of auto parts and should continue to benefit from a weak new auto market that likely has little chance of strengthening in the near term. We highlighted this trend in a Razor’s Edge piece on September 11 (Automakers Pain May Be Genuine Parts Gain). However, with AZO’s recent strong price appreciation, we have a hard time justifying establishing a position at the stock’s current level. For example, we look for stocks that are undervalued compared to historical valuation metrics such as price-to-sales and price-to-cash flow and, as you would imagine, there are currently many stocks that fit this criteria. Interestingly, AZO is not one of them, as the stock now sits within its historically normal range in each of those valuation metrics.

AutoZone has the wind at its back right now from a macroeconomic standpoint. In addition, the company likes its stock as it just authorized a $500 million share buyback just two days after releasing earnings in September. After the recent run-up in the shares, we would normally have AZO rated Fairly Valued, but our risk indexes received an adjustment factor because of the short-term oversold condition of the Services sector, which includes retailers like AZO. In fact, we have AZO rated as our least attractive stock in this segment at current valuations. So, unless there is a pull-back in AZO we would recommend looking toward other auto supply retailers that appear to be more undervalued at present, if you are looking to take advantage of the growing need for replacement auto parts.

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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