Shares of the largest aftermarket automotive parts and accessories retailer in the United States, AutoZone, Inc. (AZO), have gained 46.1% over the past year and 42.5% year-to-date. Moreover, in terms of the nine months’ performance, the stock has gained 41.6%. AZO hit its 52-week high of $1738.78 in yesterday’s trading session. The main factor contributing to this impressive rally is the company’s bottom-line growth, aided by the rising demand for auto parts thanks to a booming used car market.

Over the past months, the used car market has been expanding like never before, as new car production dwindled due to supply chain issues. According to Edmunds’s research, the average transaction price (ATP) for used vehicles climbed to $25,410 in the second quarter of 2021 compared to $20,942 in the same period last year, marking the highest quarterly used ATP Edmunds has on record.

Used cars require repairs to keep running. Also, people owning cars invested in repairs and maintenance to avoid add-on spending in buying new cars. The growing demand for aftermarket auto parts bodes due to lower production for new cars bodes well for AZO.

Here’s what could shape AZO’s performance in the near term:

Stable Financials

AZO’s net sales increased 8.1% year-over-year to $4.91 billion in the fiscal fourth quarter ended August 28. Its gross profit grew 6.4% from the year-ago value to $2.57 billion, while its net income improved 6.1% year-over-year to $785.77 million. The company’s EPS increased 15.5% year-over-year to $35.72.

In addition, AZO repurchased 592 thousand shares of its common stock for $900 million during the fourth quarter, increasing shareholder value. The company also repurchased 2.6 million shares of its common stock for $3.4 billion in the fiscal year.

Higher-Than-Industry Profit Margins

AZO’s trailing-12-month net income margin of 14.84% is 136% higher than the 6.29% industry average. Also, the company’s levered FCF margin is 144.2% higher than the 7.39% industry average.

The company’s ROA and ROTC of 14.95% and 27.28% are substantially higher than industry averages of 6.28% and 7.56%, respectively.

Furthermore, its trailing-12-months cash from operations of $3.65 billion is 1,645.5% higher than the industry average of $208.96 million.

Steady Growth

AZO’s revenues and net income grew at CAGRs of 9.2% and 17.5% over the past three years, respectively. Also, its EPS grew at a CAGR of 25% over the same period. Moreover, analysts expect AZO’s revenues and EPS to rise 5% and 11.9% year-over-year to $15.3 billion and $108.66, respectively, next year.

The consensus EPS estimate of $20.47 for the current quarter ending November 2021 indicates a 10% improvement year-over-year. The company’s EPS is expected to increase at a 14% CAGR over the next five years.

Favorable POWR Ratings

AZO has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

The stock has an A grade for Quality. The company’s higher-than-industry profit margins justify this grade.

AZO has a grade of B for Momentum, justified as it is trading well above its 50-Day and 200-Day moving averages.

Of the 67 stocks in the B-rated Auto Parts industry, AZO is ranked #28.

In addition to the grades I’ve stated above, one can view AZO ratings for Sentiment, Value, Stability, and Growth here.

View other top-rated stocks in the Auto Parts industry here.

Bottom Line

AZO benefited significantly from the rising demand for aftermarket products since the beginning of the year, with the growing used car market and increasing investment in car maintenance. The company’s sound financials and high profitability should keep investors interested in the stock, helping it keep soaring in the upcoming months.

How Does AutoZone, Inc. (AZO) Stack Up Against its Peers?

While AZO has a B rating in our proprietary rating system, one might want to consider taking a look at its industry peers, Compagnie Generale des Etablissements Michelin (MGDDY), Bridgestone Corporation (BRDCY), and Linamar Corporation (LIMAF) having an A (Strong Buy) rating.

AZO shares were trading at $1,707.25 per share on Thursday afternoon, down $29.75 (-1.71%). Year-to-date, AZO has gained 44.02%, versus a 16.83% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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