Morningstar | AutoZone’s Strong Professional Performance Mirrors Our Long-Term Thesis; Shares Slightly Rich
Our $900 per share valuation for narrow-moat AutoZone should see a low- to mid-single-digit percentage increase, largely reflecting the time value of money after the firm posted solid third-quarter results. Our long-term take (mid-single-digit top-line growth, high-teens operating margins on average over the next decade) remains intact.AutoZone posted 3% year-to-date sales growth (spurred by a 3.9% uptick in third-quarter domestic same-store sales), against an 18.2% operating margin. Our pre-announcement full-year targets (5% and 18.7%, respectively) should not change much and reflect an extra week of sales in the fourth quarter.
AutoZone’s U.S. commercial performance was the highlight, with sales up 15% in the quarter and 12% year to date. While it is ahead of our high-single-digit full-year target, the results align with our long-held view that AutoZone can use its dense store network and part availability improvements to attract a greater share of sales from professional clients. The firm has long skewed heavily to the DIY market (which accounts for roughly 80% of sales), with its mid-teens market share in that segment dwarfing its roughly 3% mark in commercial. We are encouraged by AutoZone’s progress, spurred in part by mega hub initiatives that we believe will widen its distribution and availability advantage over subscale players that still account for roughly 75% of the commercial market. While we believe the firm is unlikely to reach O’Reilly’s distribution capabilities, there is ample room for AutoZone to take share from smaller firms unable to deliver the same standard of service.
Commercial growth has not come at the expense of AutoZone’s DIY unit, which has also claimed share gains through the fiscal year. We believe a robust dual-market approach best leverages national retailers’ scale, creating additional opportunities to sell often slow-moving inventory (creating working capital advantages) while leveraging distribution and supply chain costs.
AutoZone is a retailer and a distributor of automotive replacement parts and accessories. The company operates stores in the United States, including Puerto Rico and Saint Thomas, Mexico, and Brazil. Each store carries a product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products. In addition, the company has a commercial sales program that provides commercial credit and delivery of parts and other products to local, regional and national repair garages, dealers, service stations and public sector accounts. The company also sells the ALLDATA brand automotive diagnostic and repair software.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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