AutoZone Inc (AZO) 113 Index Membership NYSE Company.doc

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1、AutoZone Inc (AZO) 1132004 Index Membership NYSE CompanyAutoZone Inc. (AZO) 11/3/2004Index Membership: NYSECompany Profile: AutoZone, established in 1978 under the name Auto Shack, is the leading retailer of automotive parts and accessories. It caters to do-it-yourself customers offering excellent p

2、roduct selection and customer service, with guaranteed quality control on all the parts. They carry both new and manufactured automotive hard parts, maintenance items, and accessories. Each store carries parts for cars, sports utility vehicles, vans, and trucks. In addition, they have commercial cus

3、tomers, offering delivery to regional and national repair garages, dealers and service stations. This represents the do-it-for-me side of the business. AutoZone currently has 3,400 stores throughout the United States and Mexico. It acquired 800 stores from other auto part retailers in 1998.Industry

4、Analysis: Porters Five Forces Overall industry rating:Unfavorable(high)ModerateFavorable(low)Threat of new entrants. XBargaining power of buyers. XThreat of substitutes.XBargaining power of suppliers.XIntensity of rivalry among competitors. X o Threat of new entrants: Anyone can open an auto parts s

5、upply store, but to establish oneself in the market and attain the level of a firm such as AutoZone, one must have high capital across all phases of service (distribution, sales, etc.) and low labor costs.o Bargaining power of buyers: Demand is quite elastic because people will go to the stores with

6、 the cheaper auto parts. AutoZone is dedicated to providing customers with the lowest prices possible.o Threat of substitutes: AutoZone is the only automotive retailer capable of handling the largest automotive accounts stretching across multiple states, as well as offering a diagnostic system calle

7、d ALLDATA. This system allows for the information to repair virtually any make and model on the road. o Bargaining power of suppliers: Automakers are less likely to produce replacement parts in mass quantities far in advance, as demand is unknown. This increases opportunities for aftermarket vendors

8、. In recent years, however, replacement parts have experienced declines in unit sales, largely because of the improved quality of the original equipment. The number of automobile parts suppliers is shrinking as companies merge or go out of business, and the trend is likely to continue. Although merg

9、ers between the largest firms are generally not occurring at present, acquisitions of smaller firms further down the supply chain are taking place. Companies are trying to bulk up via mergers and acquisitions, to better serve their customers that are expanding globally. Size can permit a parts suppl

10、ier to offer more products to customers and to spread overhead costs over greater product volumes to reduce costs and prices. It can also enhance the firms ability to follow and service manufacturers who are producing vehicles and parts throughout the world. Having the ability to make integrated sys

11、tems and modules globally, as discussed above, is an important selling point for the parts maker. By acquiring additional manufacturing capabilities to integrate products and reduce costs, large suppliers can increase their value to vehicle manufacturers, which in turn can help them win supply contr

12、acts.o Intensity of rivalry: The main competitor of the DIY automotive parts industry is the full service garage with mechanics. The number and age of cars on the road are increasing, as is the number of miles being driven. SUVs, vans and light trucks, which have dominated new car sales the past fiv

13、e years, are beginning to move out of warranty cycles and into repair cyclesbecoming the types of cars to which AutoZone caters. While people can turn to mechanics, almost half of all U.S. households are engaging in do-it-yourself automotive maintenance and repairs, according to the AAIA. This gives

14、 a favorable outlook for the DIY automotive parts firms, and especially AutoZone, the industry leader. In addition to targeting the do-it-yourself customer, the company also has a commercial sales program in the U.S. (AZ Commercial), which provides commercial credit and delivery of parts and other p

15、roducts to local, regional and national repair garages, dealers and service stations.Growth: Sources of Growth:Net sales for the 3rd Quarter of 2004 increased $71.6 billion from the same period last year. Their gross profit was $676.2million, or 49.7% of net sales, compared with $598.8million, or 46

16、.5% of net sales, during the comparable prior year period. AutoZone is experiencing both sales and earnings growth.Operating, selling, general and administrative expenses for the third quarter increased by $47.9million over such expenses for the comparable prior year period, and increased as a perce

17、ntage of net sales from 29.3% to 31.2%. 0.4 percentage points of the increase is attributable to the $4.7million gain recognized in the comparable prior year period from the sale of TruckPro. The remaining increase is primarily due to initiatives to refresh approximately 81 stores during the quarter

18、 and the opening of 151 incremental commercial sales programs. Moreover, the company expects to see sales volume increase rapidly over the next year and a half in the SUV parts segment of their market because of the increasing average age of SUVs. The average American SUV is 5.5 years old, and the a

19、utomobiles start to depreciate rapidly once they approach 7 years. This bodes well for a do-it-yourself auto parts store. The auto parts industry is in the prime state for consolidation. AutoZone occupies only 14% of the market share for do-it-yourself auto parts stores, and the rest of the market i

20、s primarily composed of smaller mom and pop stores. There is a lot of room for inorganic growth through acquisition within the industry.Basically, it looks as if the company is in the midst of high-quality growth with the option of acquisitions in a business environment that will only become better

21、within the next year and a half due to increased consumer demand.Quality of Growth:o 151 new storeso 4% increase in square footage of existing storeso 3% increase in sales at existing domestic auto parts storeso 27% increase in sales in existing AZ commercial storesStrategy: Priorities1. Retail Mark

22、et (U.S.)Having a 14% market share and being the leader in the Do-It-Yourself (DIY) automotive aftermarket, the companys goal is to drive even greater market growth.2. Commercial Market (U.S.)Currently 1% market share as parts provider for repair technicians, the company plans to push its growth by

23、offering automotive technicians more full service vehicle solutions.3. AutoZone de MexicoThe company has begun to build a presence in Mexico retail aftermarket. With an estimated 16 million vehicles in Mexico, the company believes that this market is an attractive long-term growth vehicle. Strategy

24、HighlightMaximize profitable and continued growth. 1. To capture the markets latent demand.Nearly 25 millions cars (equivalent to $60 billion of routine automotive maintenance) go unperformed each year. The companys goal is to break this maintenance inertia2. Bring in new customers and drive future

25、growth.Many cars are beginning to move out of warranty cycles and into repair cycles.3. Continue to expand its retail market share.The company plans to open about 195 retail stores at the end of 2004.Profitability: Cash Conversion Cycle: Measures how quickly a firm sells its goods (inventory), how f

26、ast it collects payments from customers for the goods (receivables), and how long it can hold onto the goods itself before it has to pay suppliers (payables). AutoZone outperforms its competition in this metric as well as in regard to Net Margin, Return on Assets, and Return on Revenues. PROFITABILI

27、TY RATIOS ( autozone )AutoZone Inc.199920002001200220032004Net Margin5.9465%5.969%3.643%8.1%9.5%10.1%ROA7.4%8.1%5.1%12.3%14.1%14.5%ROE-19%55%97%187.18%ROR14%15.9%13.6%18.1%23.5%27.4%Cash Conversion Cycle52 days44 days27 days20 days13 days17 daysDividend YieldNote: Annual Report did not have data to

28、readily calculate ROE for 1999 and 2000Net Margin = Net Income/ SalesReturn on Assets = Net Income/ Average Total AssetsReturn on Equity = (Net Income- Preferred Dividend requirements)/ Average Shareholder EquityReturn on Revenue = Net Income/ Operating Revenue Cash Conversion Cycle = Days in Invent

29、ory + Days in Receivables Days Payable OutstandingDays in Inventory = 365 / Inventory TurnoverInventory Turnover = Cost of Goods Sold/ Inventory ValueDays in Receivables = 365 / Receivables TurnoverReceivables Turnover = Sales / Accounts ReceivableDays Payable Outstanding = 365 / Payables TurnoverPa

30、yables Turnover = Cost of Goods Sold/ Accounts PayableDividend Yield=Dividend per share/ Share pricePROFITABILITY COMPS ( multexinvestor , companies sites)Company NameNet MarginROAROERORCash Conversion CycleDividend YieldAutoZone Inc.10.04%14.99%187.18%27.36%17 daysGenuine Parts Co.4.32%9.17%16.30%1

31、2.39%23 daysPep Boys-Manny Moe and Jack Inc.1.81%2.19%6.04%3.48%28 daysOReilly Automotive Inc.7.04%9.22%14.26%12.10%38 daysCASH FLOW METRICS ( autozone )(in $1,000s)AutoZone Inc.20002001200220032004Cash from Operations513459739698638Capital Expenditure250169117182185Free Cash Flow263290622516453Cash

32、 from Operations Capital Expenditure = FCF Financial HealthDebt to EquityInterest CoverageCurrent RatioQuick RatioAutoZone.10Genuine Parts Co.25-Pep Boys.58.17OReilly Automotive Inc.11-.52Note: Genuine Parts Co. and OReilly Automotive Inc. did not have Interest Coverage data readily available.Times

33、Interest Earned = EBIT Current Ratio = Current Assets Interest Expense Current Liabilities Quick Ratio = Current Assets InventoriesCurrent LiabilitiesValuation: VALUATION COMPS S&P did not speak specifically with regards to the automotive parts industry. For the Consumer Goods industry it did stress

34、 the P/E ratio as the most relevant metric. SmartMoney also indicated that in the consumer space the earnings multiples are much more relevant that the sales and book multiples.P/E Ratio (TTM)Price to BookPrice to SalesPEGMarket CapAutoZone.73Genuine Parts Co.78Pep Boys.37.64OReilly Automotive Inc.

35、AutoZone appears on par from the P/Sales and PEG ratios, undervalued from the P/E ratio, and overvalued from the P/Book ratio Given all indication P/E is the most relevant, the company looks undervalued, but the other ratios indicate caution Genuine Parts Co. is the best comparison as the two have s

36、imilar market caps. Here in terms of both earnings multiples AutoZone looks undervalued.Valuation model: DCF AnalysisCurrent year (Year 0) EPS0, $6.40 Year 1 Consensus EPS Forecast (FY1), $7.10 Year 2 Consensus EPS Forecast (FY2), $8.10 Analyst consensus long-term growth (Ltg)14.1%Plowback rateStead

37、y-state EPS Growth20.9%Stead-state ROI (cost of equity)8.1%Current Stock Price81.80 Number of Shares Outstanding (billions)0.08 Total Debt (billions of $)1.87 Total Preferred Stock (billions of $)0.00 Cash, Short-term Investments & non-operating assets (bill $)0.06 Number of Transition Years14 Compu

38、ting Cost of Equity (re)Risk-free rate (yield on 30-year U.S. govt. bond)4.98%Raw BetaAdjusted Beta (1/3 + 2/3*raw beta)Risk premium on U.S. market (rm - rf)5.00%Cost of Equity (re)8.11%Value of Equity Per ShareP/V Ratio0.58 In general the DCF model is applicable to the CPCG sector. The model is ext

39、remely sensitive to changes in the long-term growth rate, and most consumer companies have small growth rates at or slightly above the growth of GDP. AutoZone, however, has a significantly higher growth rate making the model less credible. That being said, even when AutoZones growth rate is reduced

40、to current levels of growth, the stock still appears significantly undervalued. At 14% growth from SmartMoney / Multex / Yahoo - $140 At 10% current rate/company predictions - $96The Bull Case: Growth. Not only is AutoZone opening new stores, its current stores sales growth is increasing. Market Pos

41、ition. AutoZone is the leader in the Do-It-Yourself automotive aftermarket and the #3 player in the Do-It-For-Me automotive aftermarket. Brand. AutoZone spent $15 million more on advertising in 2003 than 2002. Brand identity and loyalty is arguably the most critical factor for a consumer company to

42、maintain customers and gain new ones. Wal-Mart model. AutoZone practices everyday low prices and is able to do so through economies of scale. Its competition is hard pressed to dent its position.The Bear Case: Debt. The company has been great with its cash and paying its bills, but if that fails it

43、has an enormous amount of debt and surprisingly little equity to deal with. Energy costs. With skyrocketing oil prices, the automotive industry across the board has been hurt. The CEO cited energy costs as the main factor why AutoZone missed earnings the last quarter. Wal-Mart. “Always consider Wal-

44、Mart,” the MD of Banc of America Securities Consumer and Retail Group. The giant has not given any indication it would move into AutoZones space, but in running out of ways to continue growing it could possibly turn this direction.Conclusion: So, should we “Get In The Zone” ? Given the companys strong earnings and growth potential, the risks, and the very small proportion of our portfolio in CPCG, we recommend this stock as a moderate buy.