Vroom, vroom, boom.
You probably recognize AutoZone from the ads and iconic garages and stores you’ve seen around the US. These guys and gals know the game of selling aftermarket parts and have been doing it well for the last 40+ years.
What do they do?
They have over 600 locations, mostly in the USA but also some in Mexico and Brazil. They specialize in selling all sorts of car parts and maintenance items and have been at or near the top of this market for a long while. The first location opened in some town somewhere in 1979 (who cares where). Since then, they have been very successful at focusing on the marketing and branding and growing the locations up to 600 or so, not to mention expansion to a few international markets. They try their best to keep customers returning which you will get if you can supply the parts these customers need reliably. I suspect this is where the key to their success has been. You can get away with not being the cheapest if you can reliably have the parts people need.
Do they make money?
Yes. Revenue grows at 10-20% a year on a per share basis fairly steadily over the past 15ish years. The margins have been 50% or so on the gross side and around 20% on the operating side of things. This is a good or potentially great sign for the predictability of the business. They have been consistently free cash flow generative (and growing this cash flow along with revenues per share) and haven’t had to put too much capital into the business to grow as it scales. The capex each year has grown from 250 million per year to 500 million per year while the free cash flow has gone from 500 million to 2.6 billion a year (this is a better business at scale, apparently)…this has taken 15 years or so, but demonstrates that this business continues to grow in a way which is not just beneficial to the top line but the bottom line as well (ie. not growth for growth’s sake).
Are there reinvestment opportunities?
Yes. The company does not give regular dividends so if that’s what you want, look elsewhere. They do buy back significant amount of stock and have done so significantly and routinely for the past 15 years at least… they have had a buyback yield of 5-10% or so over the recent past. This has become a great way to allocate cash for a mature business with slow growth in the industry that they serve. Of course, this is only beneficial to owners at reasonable or low valuations.
Is there a risk of a blow up?
This company has been humming right along the highway reliably in a boring industry that likely isn’t going anywhere. Management has a track record of reasonable slow growth with share buybacks providing much of the return to shareholders. It would be expected that this trend continues into the near future at least. The one thing that will be interesting to see is if the shift towards electric vehicles will impact their core business. One might expect that maintenance and parts may be less essential for electric motors compared to old clunker combustion engines with more moving parts and oil changes and whatnot. This change won’t happen overnight and it will be important to see how management shifts gears into this new age of auto.
Is management sketchy?
GREEN LIGHT. I don’t see any signs of problems based on past performance at least. This baby seems like it has been running like a finely oiled machine… Of course it is always important to check that management doesn’t load up on too much debt or say one thing, only to do another (perhaps like a used-car salesperson). So far, the managers haven’t loaded up significant debt to be overly concerned with but this would be something to keep an eye on.
Does it have a moat?
Sort of? It does have a recognizable brand and likely has a lot of good locations that it can fend off competition with. That being said, online markets and sales will certainly compete in this day and age with the retail outlets and its hard to say how long anyone will care about a brand if they can do a google search or order their parts reliably from amazon or other online giants. I suspect a lot of this has to do with how much value they can provide to customers in store. I would caution that they don’t have a big moat (anymore) and may need to reinvent themselves sometime in the future to ensure they get their gearheads to come back.
Is it cheap?
Sort of. The price to sales is near a high at 2.5 or so compared to last 10 years and other metrics suggest that it is currently a little on the pricy side of things compared to its own history. EV/EBIT stands at 12.5 and EV/EVITDA brings it down to 10 ish. This one is likely somewhere in the neighborhood of fair value. Over a longer period of say 5-10 years you should get roughly what the business gets which is helped with continued share buybacks and a predictable, boring business model. People will still need cars, therefore car parts and these people are likely to continue going to where they normally go to buy these things.
TL:DR; you aren’t going to get ruined by some multiple compression on this one, but don’t expect a huge runup in the multiple from here either.
On one hand, this is a nice predictable business with some returns from sales growth and some from share buybacks to be expected. On the other hand, it is boring and is likely to be continuing to do what it has done for the last 40 years…. on the third hand, electric vehicles? Wait, I only have two hands (at least for now). For those who didn’t notice, the first two hands are good things for investors and the third hand is in the future and therefore unknowable (something about a bird in the bush, yadda yadda yadda).
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