Stock of the Day
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AutoZone (AZO)
AutoZone is a Place for Car Parts and Profits
Tuesday morning, AutoZone reported a net income of $115.9 million for their Q2, which ended February 14. This was easily higher than analyst estimates of about $105-107 million. Acting upon this news, investors sent the stock soaring beyond their 52-week highs. In the early morning session, this figure reached up to $157.49 per share. The profits seem reasonable too. Despite economic conditions, consumers still need to drive to and from their destinations, and if they cannot afford to purchase a new vehicle, they will do what they can to repair an existing one. So, it seems like a good time to be a car parts retailer. However, as profitable stocks become increasingly scarce during this recession, can AutoZone sustain such results for the remainder of this year?
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Without any unforeseeable circumstances, yes they should be able to. Car manufacturers, local and abroad, are struggling to reach consumers. While they innovate and create new designs for new cars, consumers are finding it increasingly difficult to purchase such vehicles. In fact, Toyota (TM: Charts, News, Offers), the largest car-manufacturer in the world by sales, was reportedly in talks with the Japanese government for a loan of 200 billion yen ($2 billion). They are also expecting an annual loss, which would be the first time in over 59 years. In the US, General Motors (GM: Charts, News, Offers) continues to face a host of troubles. Their most recent one involves SAAB trying to sell itself to interested buyers. As car manufacturers scramble to restore their empires, consumers will do their best to avoid buying costly new vehicles and opt to repair their existing ones. The recession is helping AutoZone too. CBS News reported that consumers are saving more and more money. From this information, those that can afford a new vehicle will probably refrain from purchasing one until they absolutely have to.
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On the other hand, rival Advanced Auto Parts (AAP: Charts, News, Offers) reported negative results just two weeks ago. Is this an indication that this quarter's profit was just a fluke? Probably not. Not including this quarter, AutoZone beat analyst estimates two out of three times. Furthermore, this past quarter is the company's 10th consecutive quarter of double-digit growth. Looking at oil prices, profit margins are also boosted higher due to lower transportation costs. From the surface, it seems as though the company is a perfect investment given current economic conditions.
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However, nothing is perfect. The company put up 20 new stores in the US and they ended up closing one in the quarter. It is true that oil prices are declining due to demand falling greater than supply can match, but production is also continuously falling. Eventually, the two will be on the same level. Also, it seems the company's gross margin fell to 49.7 percent from 49.9 percent. Experts are attributing this to increased theft. In this case, macroeconomic events have created a double-edged sword for the car-parts seller. But the factor that dwarfs all of the above is relative to the cars themselves. Due to the increasing complexity of newer cars, individuals are finding it increasingly difficult to maintain their own vehicles. Though some may be in need of simple repairs, individuals may lack the pertinent knowledge on which part to purchase. This is a viable threat to the company and could force them to adjust their business model not too far in the future.
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Though long-term prospects of the company may be questionable, there is no denying the company is a solid investment today. Their ratios are strong, and their balance sheet does not raise any immediate concerns. But most importantly, they have consumer demand on their side. Unless things drastically change in the near future, we can expect AutoZone to be a good short-term investment for possibly the rest of 2009.
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Profile |
Click here to view a detailed profile of AutoZone.
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