Auto parts stocks have been on a roller-coaster ride this past year and companies like AutoZone, Inc. (NYSE:AZO) have put out erratic earnings reports.
Sometimes it seems like the sector is a disaster, and other times it seems like things are just fine. In the morning, shares of AutoZone will be on the move again because AZO earnings will have just come out.
So what are the forces at work here and what is the play for AZO stock?
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Pros and Cons of AZO Stock
The bull case for AZO stock has a few points. First, take a look at the plethora of new and remanufactured parts and supplies it offers: A/C compressors, batteries and accessories, belts and hoses, calipers, carburetors, chassis, clutches, CV axles, engines, fuel pumps, fuses, ignition and lighting products, mufflers, radiators, thermostats, starters and alternators, and water pumps.
Then there’s the complete set of fluids, brake parts, filters, sensors, refrigerants, and discretionary products like air fresheners, cell phone accessories, drinks and snacks, floor mats and seat covers, protectants and cleaners, sealants and adhesives, steering wheel covers, stereos and radios, tools, and wash and wax products.
Everything you could ever want for your care is available at AutoZone, and that puts it firmly in the superstore category.
But here’s the thing about all these parts and accessories: people will always need them. There are roughly 250 million cars on the road in the country, and AZO has over 5,300 stores to service them — not to mention another 500 in Mexico.
Cars always need maintenance. They always need parts because cars wear out. They are a depreciating, deteriorating asset. People need cars and need to have those cars maintained. Autozone stock has soared over the years because it has economies of scale. It can negotiate lower prices with manufacturers.
The other thing about AutoZone is that it is theoretically recession-proof. If new cars stop selling, then used car sales pick up. In fact, used cars will need more maintenance and attention.
Autozone has a consistent business, consistent free cash flow and it’s firmly entrenched in Peter Lynch-stalwart territory with a long-term growth rate of about 10%.
On the bear side, however, there are a few things to be mindful of. New car sales are having a lousy year. In November alone, new car sales fell 10% over last year. Small vans and minivans fell 10% and 12.7% respectively. The rest of the light-duty truck segment rose about 4.4%.