This under-the-radar retailer has crushed it for investors.
Investors don't have to just focus on the dominant tech firms, such as the "Magnificent Seven" businesses, to find lucrative stock ideas. AutoZone (AZO -0.02%) proves this, as its shares are up 230% in the last five years (as of Feb. 29). That gain beats the S&P 500 by a wide margin.
You might want to scoop up this auto parts retail stock in the hopes of riding the strong momentum to impressive portfolio returns. But before doing that, here are three things you need to know about AutoZone's business.
1. Strong fundamental performance
AutoZone's stock performance can be credited to fundamental strength. The company's revenue and net income have increased at annualized rates of 6.8% and 10.3%, respectively, in the last 10 years. Even during unusual times in the last few years, a period that includes the coronavirus pandemic, supply chain bottlenecks, inflationary pressures, higher interest rates, and economic uncertainty, AutoZone continues to grow its sales and earnings.
It's easy to be optimistic about the company's long-term prospects. For starters, the industry is extremely fragmented, giving a scaled operator that has sufficient inventories and adequate distribution capabilities a huge leg up versus smaller rivals.
Plus, AutoZone benefits from the fact that not only are more miles driven each year, but that the age of cars on the road increases. The more time a car spends outside the original manufacturer's warranty, the better the situation is for the business.
2. Buying back shares
Despite being a mature enterprise, AutoZone does have opportunities to open more stores in the U.S. and internationally. Its profits are more than enough to reinvest in these types of expansionary initiatives.
Besides growth, perhaps nothing else is more important to the management team's capital-allocation policy than repurchasing shares. In fiscal 2023, the company generated $2.1 billion of free cash flow, but it bought back $3.7 billion worth of outstanding stock.
There's no end in sight. "At quarter end, we had just over $2.1 billion remaining under our share buyback authorization," said CFO Jamere Jackson on the Q2 2024 earnings call.
The trends over the long term are nothing short of spectacular. Since the start of fiscal 2014, AutoZone's outstanding share count has been reduced by 51%. This has a direct positive impact on earnings per share, which has climbed at a compound annual rate of 17.8% between Q2 2014 and Q2 2024.
Investors should be very pleased with the leadership team's decision to buy the stock, especially since it trades at a compelling forward price-to-earnings ratio of 19.7.
3. Durable demand trends
It seems like there hasn't been a greater focus on the state or direction of the economy than what we've experienced in the past 12 or so months. Is there going to be a recession? Will it be mild or severe? These are questions on everyone's mind.
AutoZone shareholders care less about the macro picture. That's because this company is recession-proof.
In economic downturns, consumers are less inclined to buy new cars, instead opting to invest in extending the useful lives of their current vehicles. Here's where AutoZone and its 6,332 nationwide stores shine.
And even when the economy is booming, with low interest rates and strong consumer spending, this business performs well. In this scenario, people drive more miles, which increases wear and tear on their cars. AutoZone sells the merchandise needed to keep consumers on the road.
By thriving no matter what the macro backdrop looks like, this company gives its shareholders invaluable peace of mind. With better knowledge about AutoZone, investors can make an informed decision about the stock.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
