AABP Award 728x90

AutoZone may be the right vehicle


Dear Mr. Berko:

Two years ago, I decided to buy new belts for our 1990 Mercedes-Benz. When I visited the Mercedes parts counter, I almost keeled over from a heart attack. The counter person was understanding and suggested I could buy the same equipment at AutoZone for a lot less. And a lot it was: $435 worth of belts and a few other replacement parts cost me $129 at AutoZone. I’ve been buying parts there ever since. My wife thinks AutoZone could be a good buy using $8,000 we made from the sale of some Walgreen Co. stock. We would appreciate your advice.

R.L., Deerfield Beach, Fla.

Dear R.L.:

The only time to ever service your car at the dealer is when it is under warranty. A skilled local mechanic will charge you 50 percent to 70 percent less than the dealer for the same work. What’s more, he probably buys the same parts wholesale from AutoZone that Mercedes, Chevy or Saturn dealers use when they repair your car. AutoZone is, indeed, easy on your pocketbook.

I remember when AutoZone Inc. (AZO-$85) went public with an initial public offering in 1991. Goldman Sachs led an underwriting group that sold 15 million shares at $21. A year later, AZO split 2-for-1, and in May 1994, the stock split 2-for-1 again. So a seminal investment of $2,100 in 100 shares of AZO has matured today into 400 shares at $85 with a market value of almost $34,000. That’s a 16-fold increase in value.

In 1991, AZO produced $801 million in revenues from 549 stores. Today, it operates 3,100 retail locations in 44 states, 60 percent of which are corporate owned. It sells more than $5.3 billion worth of alternators, air filters, antennas, wiper motors, wheel bearings and water pumps for almost every make of vehicle that operates on U.S. roads and highways.

When most cars reach the age of 6, they really start to fall apart, piece by piece, and need an increasingly larger amount of post-warranty work. The 6- to 9-year-old car is the largest class of auto on the road today. Combine this with a rise in vehicle usage and you have the main ingredients that continue to increase AZO’s revenues and earnings.

Management recognizes this phenomenon and has embarked on a successful marketing strategy stressing preventive maintenance. This growing market, aided by AZO’s commercial delivery program, accounts for 11 percent of the company’s revenues. AutoZone has experienced a significant increase in sales to myriad small commercial repair shops, which has markedly improved same-store sales 8.1 percent, 12 percent and 9.5 percent in its last three quarters. These impressive revenues have improved AZO’s net profit margins from 6 percent several years ago to 8 percent last year to an anticipated 8.7 percent this year.

If it attaches to an engine, a transmission, a cooling system or an air-conditioning system of a car, sport utility vehicle, truck, light truck, van, sports car or convertible, AZO sells it. Its product line also includes radios, floor mats, antifreezes, brake and power steering fluids, oils, moldings, waxes, polishes, batteries, bulbs, rims, seat covers and a mountain of maintenance items, all at prices that are lower than those at traditional auto parts stores. Heck, you can buy a whole engine and transmission for your car and AZO will give you replacement instructions, too (check out “Repair Info” on www.autozone.com).

The suits on Wall Street figure AZO’s 2003 earnings will come in at $5 a share, up from $4 the previous year. The same suits put 2004 earnings at $5.75 a share on revenues of $6.1 billion. Meanwhile, the company has an aggressive share buyback program and has reduced its outstanding shares from 152 million in 1998 to 99 million shares last year. It expects to continue its repurchase program, and by the end of 2003 expects to reduce the number of outstanding shares to 93 million.

AZO trades at a very reasonable 19 times earnings, which is compelling considering its average price-earnings ratio during the past 11 years is 21. I believe AZO should comfortably trade at 20 times earnings and if 2004 projections of $6.02 per share net income are on target, this stock should trade at $120 a share. Buy it.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or visit his Web site at www.berkoradio.com.

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