AutoZone (AZO) poised to thrive on strong used-vehicle sales, for now

The macroeconomic uncertainty brought about by coronavirus has urged people to keep a tab on discretionary spending. Not surprisingly, most people prefer used vehicles when it comes to buying one, adding to the troubles of automakers already struggling with issues like production delay.

On the other hand, auto parts retailers like AutoZone, Inc. (NYSE: AZO) are benefitting from the change in customer preference. The company witnessed record store traffic this year, which prompted the management to expand the store network and hire hundreds of new employees. It has outperformed competitors for a long time and is well-positioned to tap opportunistic both at home and overseas.

Buy AZO?

AutoZone has always been an investors’ favorite, more so for those who can afford the stock. The bullish outlook suggests that potential buyers should not be dissuaded by the apparently high valuation, for experts see the stock growing further through next month’s earnings and beyond. Meanwhile, like all growth stocks, AutoZone is not entirely risk-free, especially when it comes to short-term investment. Also, the company does not pay dividends and is unlikely to do so soon.

The growth strategy for Latin America, the main market outside the U.S, has been successful so far. When the store operator reports its first-quarter results on December 22, 2020, the market will be looking for earnings of $17.43 per share on revenues of $3.12 billion — indicating double-digit growth.

Bullish View

The Memphis, Tennessee-based company has stayed unaffected by the invasion of e-commerce platforms like Amazon (AMZN), thanks to the unique operating model with focus on customer experience. The company increased revenues consistently in the past two decades and its resilience during the pandemic shows the momentum is unlikely to wane in the near future. For the many people who take up do-it-yourself projects to beat the shelter-in-place blues, auto maintenance is a priority area.

From AutoZone’s fourth-quarter earnings conference call:

“As for the long term, to date, we don’t see anything that substantially changes our bullish view on our industry, but we must continue to monitor consumer shifts in behavior. And if the economy enters a deep and protracted recessionary environment, we continue to believe our customers will focus more on maintaining their current vehicles and it will benefit our business, Retail in particular, as it has in the last three recessions.”

Though there was a slowdown in the early months of the crisis, vehicle miles traveled improved significantly in recent weeks. One concern is that the company’s prospects might get affected if there is a mass shift to electric vehicles, which have fewer parts and are easy to maintain.

Record Comps

The highlight of AutoZone’s fourth-quarter report was the record growth in comparable-store sales, reflecting the strong demand for used vehicles. Consequently, revenues and earnings increased in double-digits to $4.5 billion and 30.9 per share respectively. The results also exceeded the consensus forecast.

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Read management/analysts’ comments on AutoZone’s Q4 results

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Shares of AutoZone are currently trading at the levels seen at the beginning of the year, after bouncing back from the COVID-related selloff early this year. The stock, which hit an all-time high of $1,250 in September, outperformed the broad market this week.