EUR 850.00 For Business Accounts Only

Morningstar | Our Long-Term Outlook Endures for AutoZone After Strong 2Q

We expect to lift our $830 fair value estimate for narrow-moat AutoZone by a mid- to high-single-digit percentage to reflect a strong second-quarter. The results are consistent with our view that industry conditions should remain attractive, particularly as winter weather to date has been favorable and the number of vehicles entering their most repair-heavy years is increasing. Consequently, we still expect mid-single-digit top-line growth against high teens adjusted operating margins over the next decade. With the shares trading higher than our valuation even after considering the planned increase, we suggest investors await a more attractive entry point.

In the first half, AutoZone saw sales rise 2% against a 17.4% EBIT margin, up around 10 basis points from the same period last year (excluding fiscal 2018 impairment charges). Our preannouncement forecast for fiscal 2019 called for 5% top-line growth against 50 basis points of margin degradation to around 18.5% (distorted somewhat by 2018 business divestitures).

Domestic commercial sales were particularly strong, posting 13% quarterly and 10% first-half growth; we had expected an 8% full-year expansion. We have long seen the sector as a growth driver, as AutoZone leverages its leading midteens do-it-yourself market share to boost its roughly 3% commercial segment mark. AutoZone has prudently worked to improve parts availability by expanding its hub and megahub store network. While market share growth should be slow (we expect a mid-single-digit mark by the end of our 10-year explicit forecast), considering the time needed to develop relationships in a price-insensitive industry, we believe AutoZone's efforts are well timed, as we anticipate the commercial segment should grow faster than its DIY counterpart in the long term, given vehicles' increasing complexity. As a robust dual-market effort maximizes cost leverage and working-capital efficiency, we are encouraged that AutoZone is on track.

We elaborated on our views of the industry's distribution efforts in "Distribution Revolution: O'Reilly Leads Sector's Availability Efforts." While we still believe that O'Reilly has the sector's best part availability and distribution strength, we see AutoZone's approach as prudent, given its historically DIY-heavy mix (around 80% of sales versus 60% for O'Reilly).