AutoZone, Inc. (NYSE:AZO)

CAPS Rating: 3 out of 5

The Company is a specialty retailer of automotive parts and accessories.

Recs

2
Player Avatar TMF1000 (99.67) Submitted: 5/24/2012 9:02:57 AM : Outperform Start Price: $362.96 AZO Score: -5.32

I added AZO to Caps at 362.96. The PE ratio then was 16.36. I like this company because it has had a long history of success. Earnings continue to grow at an amazing rate. Earnings grew 24% for the latest quarter. Autozone tends to better in recessions when people do more of their own repairs. So in a way its a defensive play.

A recession would drop the price. During the Great Recession, the price fell to $84.66 and a PE of 8.43. But then the earnings were only $10.04. A similar PE today would bring the price down to $186.98. I just want to keep that price in mind.

TTM cash flow for the second quarter was $24 a share. That would be a cash flow yield of 6.6%. That wasn't too far off its Great Recession cash flow yield low of 7.7%.

September 20, 2011 4Q:2010 earnings’ highlights:
** Revenues were $2.642 billion up from $2.445 billion
** Fiscal 2010 revenues were $8.073 billion up from $7.362 billion
** TTM Revenues were $8.073 or $192.29 per share
** 4Q earnings were $7.18 up from $5.66 per share
** Fiscal 2010 earnings were $19.47 up from $14.97 per share
** Diluted share count 41.984 million
** Cash flow for the year was $970 million or $23.10 per share
** Cash $97.606 million: debt $3.35 billion
** Trading range between September 20, 2011 and December 6, 2011 was $307.16 to $343.90. PE ratio range was 15.78 to 17.66: PS ratio range was 1.59 to 1.79: Cash flow yield range was 6.7% to 7.5%

December 6, 2011 1Q:2011 earnings’ highlights: Before the opening bell
** Revenues were $1.924 billion up from $1.792 billion
** TTM revenues were $8.205 billion or $200.79 per share
** Earnings were $4.68 up from $3.77
** TTM earnings were $20.38
** Stores 4,551 up from 4,404: Same store sales were up 4.6%
** Diluted share count 40.864 million
** Cash flow for the quarter was $280 million down from $311.5 million
** Capital expenditures were $61.924 million up from $45.811 million
** TTM cash flow was $938.5 million or $22.97 per share
** Trading range between December 6, 2011 and February 28, 2012 was $313.11 to $367.59: PE Ratio range was 15.36 to 18.04: PS ratio range was 1.56 to 1.83: Cash flow yield range was 6.3% to 7.3%

February 28, 2012 2Q:2011 earnings’ highlights:
** Revenues were $1.804 billion up from $1.661 billion
** TTM revenues were $8.348 billion or $207.47 per share
** Earnings per share were $4.15 up from $3.34
** TTM earnings were $21.19 per share
** Diluted share count 40.237 million
** Stores 4,867 (including 4,580 domestic stores) domestic same stores sales were up 5.9%
** Cash flow for the six months was $328.8 million down from $332.8 million
** TTM cash flow was $966 million or $24 per share
** Trading range between February 28, 2012 and May 22, 2012 was $362.66 to $399.10: PE ratio range was 17.11 to 18.83: PS ratio range was 1.75 to 1.92: Cash flow yield range was 6% to 6.6%

May 22, 2012 3Q:2012 earnings’ highlights:
** Revenues were $2.112 billion up from $1.978 billion
** TTM revenues were $8.48 billion or $214.25
** Earnings were $6.28 up from $5.29
** TTM Earnings were $22.18 per share
** Diluted share count 39.59 million
** Stores 4,910 (domestic stores 4,613)
** Cash flow for nine months was
** Trading range between May 22, 2012 and the present was

No cash flow for the third quarter yet

tom e

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Member Avatar yooperking (69.50) Submitted: 12/12/2013 11:50:03 AM
Recs: 1

How about their debt (and liability) levels and negative book value, to the tune of $1.687 billion? Have you calculated their price to book value? Forget the recession; what happens if interest rates rise and people start panicking about Autozone's ability to remain as a going concern? This is an accident waiting to happen. Declaring bankruptcy is a real possibility with this company.

Member Avatar TMF1000 (99.67) Submitted: 12/15/2013 3:58:46 PM
Recs: 4

Hi yooperking,

The debt isn't from their business. They have over they years purposely borrowed money in stages to buy back shares. The more recent debt is borrowed at a very low interest rate. Every year, some debt comes due, so they can buy back debt regularly and refinance at lower interest rates to buy back more shares. They have $500 million due in 2014, but they generate over $1 billion in cash flow, so its easy to pay off. This is going to scare you: they don't have $1.6 billion in debt, but rather over $4 billion in debt.

They continue to issue new debt to fund share buybacks and other corporate matters. But they stagger debt over many years at very low interest rates. Interest expense has grown to $175 million per year, but they produce about $1 billion in cash flow per year, more than enough to service debt and pay it down. If they wanted to keep debt at $4 billion, they would still have $400 million or more to buy back shares every year.

Debt in 1000's
5.875% senior Notes due October 2012 effective interest rate of 6.33% - Paid off
4.375% senior Notes due June 2013 effective interest rate of 5.65% - $200,000
6.500% senior Notes due January 2014, effective interest rate of 6.63% $500,000
5.750% senior Notes due January 2015 effective interest rate of 5.89% $500,000
5.500% senior Notes due November 2015 effective interest rate of 4.86% $300,000
6.950 Senior Notes due June 2016, effective interest rate of 7.09% $200,000
7.125% senior notes due August 2018 effective interest rate of 7.28 $250,000
4.000% senior notes due November 2020 effective interest rate of 4.43% $500,000
3.700% senior notes due April 2022 effective interest rate of 3.85% ………. $500,000
2.875% senior notes due January 2023 effective interest rate 3.21% ……… $300,000
3.125% senior notes due July 2023 effective interest rate of 3.26% ………… $500,000

They don't need the debt to expand their business so why do it?

They believe that this is a good way to return cash to shareholders.

This is an amazing fact about Autozone.

In 2003, they had 96.9 million shares outstanding. Today they have 36.5 million shares. They have reduced share outstanding by about 9.5% annually over 9.34 years. If they wanted to pay off their debt, they could issue 11 million shares of common stock at a discount to the market of $50 and collect $4.05 billion and raise their shares outstanding to 47.5 million shares outstanding. So I don’t see debt as being a problem. It would take less than 11 million shares to eliminate debt completely and they have taken more than 60.4 million shares off the table – that, in my opinion, equals substantial value creation. They could do this in stages as debt becomes due if they wanted to do that. So in this case, the debt doesn't seem risky – it is structured well.

Also during the Great Recession, cash from operation moved up every year. Their cash flow is extremely predictable. At the rate they bought back shares in the last two years, a slower rate for them, they will be down to 1 share outstanding in about 12 years. I doubt they will do that, but it is interesting.

So its my opinion that bankruptcy isn't possible for them. It would be too easy for them to issue shares to pay off debt if they needed to do that. Since they now make about $1 billion in cash flow, when they only need to make about $500 million to keep paying off debt, bankruptcy is almost impossible. It would take a major disaster, I mean nationwide, disaster such as YellowStone turning into an active erupting super volcano to doom Autozone and just about every other company.

If you check any company that went bankrupt in the last four decades, all of them had one thing in common, they had debt, but they didn't have enough cash flow to service the interest on the debt. Most of them, didn't have cash flow. Autozone produces predictable streams of cash flow and has done so in the worse of market conditions, so I would say barring YellowStone turning our farmland into mountains of soot, Autozone should be about as safe a stock as you can buy.

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