originally posted at Minyanville.
by Chris Georgopoulous, SmartStops contributor
Autozone (AZO: NYSE), a retailer of automotive replacement parts and accessories has seen an unprecedented appreciation in value over the past few years while most equities have been punished from an economic recession. While the success of Autozone’s stock, management and business model are unquestionable there is still one question that needs to be answered; “Will it continue? “
Most businesses experienced negative effects from this past economic recession, Autozone triumphed. The marketplace for new cars dried up quickly when personal income and spending dropped. With less money in the pockets of consumers, the more they had to rely on their aging autos. Aging autos need to be constantly fixed, and where did consumers go to replace those batteries, headlights and fuses? That’s right, “Get in the zone….Autozone”!
This macroeconomic factor is the foundation of the growing demand, but it wouldn’t have propelled the stock alone. A competent management focused on using this ever growing cash flow to aggressively repurchase shares, open new stores and concentrated on maximizing same store sales figures. The stars aligned for Autozone and they took advantage of it.
Simple Moving Averages to highlight; 20=$292.10, 50=$271.55, 200=$178.82
The same success can be seen in the technical and fundamental analysis of their stock. From its lows in early December 2008 the stock has increased from the mid $80s to over $300. The Stock has not once broken its 50 day SMA, which was tested for the first time in 2 years during the most recent market correction. Once tested the stock quickly rebounded in defiance of the overall market and broke to new highs.
Fundamentally the market may even be discounting the stock’s value. Yahoo Finance lists the next five years growth rates at around 15%, with 2012 EPS estimates from $19.25/share to just over $21/share on the high end. Autozone trades today just over a 17 multiple, at this simple calculations the stock is undervalued to future earnings. Also consider that the company has consistently beat analyst expectations over the past year. If this continues this could add to the validity of their P/E. Autozone has also aggressively bought back stock which since 1998 have totaled over $10.4 Billion in authorizations. These Buyback programs will continue to lower the float which will increase the earnings growth.
Are there risks? Of course, every investment has risk. Every investor has to be aware of the specific risks to each of their investments. In the words of Jesse Livermore, “Always be aware of the danger signals.” I have highlighted three possible factors that could affect the upward trend of Autozone.
- Gas prices. If prices at the pumps increase dramatically, people will drive less which will eventually lower the demand for replacement parts and accessories. Watch the crude oil and refined futures markets or the United States Oil Fund (USO: NYSE)
- Technical breakdown and/or Market Shakeout. Jesse Livermore stated in his book, How to trade in stocks, “The stock market is never obvious. It is designed to fool most of the people, most of the time.” I think this statement is truly valid for the shareholders of Autozone. After reviewing the technical and fundamental views, the stocks looks poised to continue its move higher. It seems almost like a no-brainer. This scares me, almost too good to be true, right? I think that any move lower could trigger stops upon stops, driving investors to question the trend. I would watch the 50 day SMA closely since this level has yet to be broken in over 2 years. A sustained move under this average on high volume could trigger a serious danger signal.
- The Economy. The largest risk to Autozone I believe cannot be controlled. The economy will decide for them. A strengthening in the economy would drive consumers back to newer cars, leaving less demand for replacement parts for the aging ones. The expansion of stores will lead to higher costs and more debt on balance sheet. If Same Store Sales fall, the stock may experience a drop in multiple because of the drop in growth. A drop in growth will take the wind out of the stock’s sails. This will be harder to identify, but pay attention to every earnings call and be aware of any changes in future growth estimates. Just as important watch Autozone’s competitors, they will also be affected by such macroeconomic factors. Advanced Auto Parts (AAP: NYSE), Pep Boy’s (PBY: NYSE) and O’Reilly Automotive (ORLY: NASDAQ).
However, the current grid lock in Washington, the promise of Fed to leave interest rates low for at least two years and current questions of the validity of Eurozone doesn’t show a lot of confidence that the economy will improve dramatically anytime soon. I believe Autozone is and will stay “In the Zone” but as Jesse Livermore said “Don’t buck the trend…but be aware of the danger signals” (How to trade in Stocks) I would maintain a long position in the stock until the market tells me otherwise. Currently SmartStops.net gives Autozone a “Normal” risk state. Their Short-Term exit trigger is $296.10 and their Long-Term exit trigger is $277.38. Visit SmartStops.net today, for these exit triggers change with the market conditions and will help you evaluate an exit strategy when you see a danger signal.