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Three Reasons AutoZone Could Keep Cruising in 2022
Stock Analysis & Ideas

Three Reasons AutoZone Could Keep Cruising in 2022

Shares of AutoZone (AZO) have kept their foot on the gas throughout 2021, posting an impressive gain of almost 70% year-to-date. The chart is in a clear uptrend, and there could be plenty of runway ahead. Here are three reasons why I am bullish on AutoZone for 2022 and beyond. (See Analysts’ Top Stocks on TipRanks)

Favorable Environment

AutoZone is benefiting from a market environment where the value of used cars has never been higher. Used cars are staying on the road longer than before as supply chain issues curtail the supply of new cars.

If used cars are driving more miles and thus accruing more wear and tear, consumers will inevitably need to spend more on repairs and replacement parts to keep these vehicles on the road.

Furthermore, suppose consumers feel better about the value of their used cars. In that case, they will be more willing to invest in repairs and maintenance for them, as these will represent a smaller outlay when compared to the overall value of the vehicle.

Lastly, if new cars are few and far between, many consumers will have no choice but to continue maintaining their older vehicles. All of these factors bode well for AutoZone.   

Valuation

With a price-to-earnings multiple of 19, AutoZone isn’t resoundingly cheap, but it is a reasonable valuation compared to the broader market.

Furthermore, AutoZone actually trades at a slight discount on a P/E basis when compared to its peers like O’Reilly Automotive (ORLY), Genuine Parts Company (GPC), and Advance Auto Parts (AAP), which all trade at 23-24x earnings.   

Returns to Shareholders 

While AutoZone does not pay a dividend, it is a share buyback machine. The company has authorized nearly $30 billion worth of buybacks since 1998. It repurchased $900 million worth of shares during the past quarter.

On Thursday, December 16th, AutoZone’s board authorized the repurchase of an additional $1.5 billion worth of shares as part of this program. This represents about 3.6% of the current shares outstanding.

Share repurchases are accretive to shareholders because they reduce the number of shares outstanding and increase earnings per share. They can also be a signal that management believes shares are undervalued, and they provide a backstop to valuation. Some investors prefer share buybacks instead of a dividend, as they view this as a more tax-efficient way to return capital to shareholders. 

Wall Street’s Take

Turning to Wall Street, AutoZone earns a Moderate Buy consensus rating. This is based on nine Buys, five Holds, and a single sell rating assigned in the past three months. The average AutoZone price target of $2077.47 represents just 4.2% upside from current levels, but it is important to note that there is a wide divergence in individual price targets.

The highest target on the Street is $2,500, while the lowest analyst target is $1490.

Looking Ahead

2021 was a great year for shareholders of AutoZone. I am bullish heading into 2022, as the company enjoys favorable tailwinds from the used car market (and the supply chain challenges constricting the new car market) as it continues to buy back shares, all while trading at a relatively modest valuation. 

Disclosure: At the time of publication, Michael Byrne did not have a position in any of the securities mentioned in this article. ​

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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