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3 Reasons AutoZone Could Top Its Record Rise | The Motley Fool

Car parts seller AutoZone (NYSE:AZO) reached its all-time high during trading on Friday, July 16, with a stock price above $1,600 at market close. Its performance might look overheated, perhaps driven by inflation and stock market exuberance after the end of lockdowns. While there could be a dip in the near future, there are some solid reasons to think it’ll keep its foot on the gas for some time to come. Here are three to consider.

1. It’s delivering sizzling growth

Everything appears to be currently turning up roses for AutoZone, with the market and its operations meshing almost perfectly to drive outstanding results. During its fiscal third quarter of 2021, ending May 8, its revenue jumped 31.4% year over year, while its efficiency improved, with operating expenses as a percentage of sales dropping from Q3 2020’s 35.9% to 30.4%. Growth was strongest in the commercial segment at 44%, driven by orders from “local, regional and national repair garages, dealers, service stations and public sector accounts” in the U.S., Mexico, and Brazil.

Image source: Getty Images.

Bottom-line growth was even more explosive, with earnings per share (EPS) rocketing 84% to $26.48. The company also committed some of its resources to its share repurchase program, buying back $900 million worth of shares to increase stock value for shareholders. It still has $1.3 billion earmarked for further buybacks. Meanwhile, its total debt has edged downward slightly, while its cash has nearly doubled to $975.6 million, meaning its balance sheet is looking healthy, too.

These are strong results, and CEO Bill Rhodes says the company is investing in its own operations “opportunistically” to keep up the momentum. It continues to open stores in its most important markets, and is focusing on increasing its market penetration, especially in its successful commercial sector. During the Q3 conference call, Rhodes noted commercial sales are a particular source of long-term strength, since they are less likely to be temporarily affected by the recent stimulus checks compared to DIY purchases, and therefore probably part of a lasting trend. He added AutoZone’s executives have “big expectations to continue to grow commercial at fairly robust rates going forward.”

2. Used cars are still making big gains

The stringent COVID-19 lockdowns the government enforced during 2020 gave a major boost to the used car market, as economic activity stalled, small businesses withered, and consumers’ income shrank as a result of the policies. Shortages of new cars caused by this year’s chip shortage lengthened out the trend, with online used car company Carvana reporting a 76% jump in units sold during Q1 2021. This follows a 39% jump in its late 2020 sales and a 59% sales surge for similar enterprise Vroom.

Used car prices have also jumped as more people buy pre-owned vehicles. Edmunds.com research indicates the average cost of a used vehicle has risen 30% since the start of 2020, Bloomberg reports. Some desirable car models are even selling for more than they originally cost new. Cox Automotive data shows new car affordability continuing to worsen, though it also reports used vehicle wholesale prices fell 1.3% in June, showing used car prices may be stalling or even preparing to dip from their high.

With used car prices higher, people with working vehicles have an incentive to keep them running rather than replacing them when mechanical problems occur, helping to improve both commercial and DIY parts sales for AutoZone. Commercial operations, profiting more from used car sales, have a motive to fix up used inventory to sell during the current price boom. Owners of extra used vehicles may also decide to fix them up and sell them out of a similar profit motive, rather than just leaving them parked in a garage.

All these trends spell increased orders for AutoZone and its fellow parts sellers. It’s also positioned to benefit from sales driven by the emergence of the delta variant of COVID-19, which the government may respond to with fresh lockdowns. New lockdowns would likely accelerate sales and price increases in the used car market, or at least maintain them at the current high levels — boosting or maintaining demand for parts.

3. Its business model is in with tune with the times

The last bullish indicator to consider is AutoZone’s continued development of delivery and digital ordering. During the conference call, CEO Bill Rhodes noted it has increased its parts availability through extending its “mega hub” model, while improving its mobile app to streamline ordering and technology investments, “helping us lower our delivery times.” Fast delivery is helping win and keep commercial customers, already noted as an important growth sector for upcoming quarters, according to the CEO’s remarks.

Online, pickup, and delivery ordering are all targeted for continued improvement. AutoZone is clearly working to make sure its gains last in the modern market by plugging into retail changes brought by COVID-19 and the internet revolution — signs it’s on the right track to potentially stack up even higher-octane stock market gains and making it well worth looking at by investors interested in consumer durables stocks

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


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