Get Out of the Zone Before There's a Breakdown
Dec 7th 2011 11:03AM
Updated Dec 7th 2011 1:02PM
Lately, I've been pretty forthcoming about admitting when I was wrong, and my take on AutoZone (NYS: AZO) is no different.
Almost a year ago I opined that strength in new U.S. auto sales from Ford (NYS: F) and General Motors (NYS: GM) should be enough to knock the auto parts supplier off its high horse. With new cars lasting considerably longer than they did even a decade ago, I thought the need for auto parts should have diminished.
Well, I was right... for about one month, before the stock regained its momentum and motored even higher than my original thumbs-down.
Nearly a year later, I'm seeing warning signs yet again from AutoZone. However, this time they're based more on concrete financials rather than wishful thinking.
First up is AutoZone's burgeoning debt pile. Just when you thought AutoZone couldn't possibly take on any more debt, the company proves otherwise. Based on the company's first-quarter results, AutoZone is now carrying $3.35 billion in debt, up significantly from the $2.96 billion in debt it reported in the year-ago period. This wouldn't be a problem if the company carried a sufficient amount of capital for emergencies -- but it simply doesn't. With only $97 million in cash on hand, shareholders are left with a massive equity deficit to the tune of $1.35 billion. AutoZone's debt situation is one crisis away from being a crippling problem.
Second, year-over-year growth is slowing across the sector. Now don't misconstrue my words, because a 4.6% jump in same-store sales is still decent. However, relative to the 9.5% same-store sales growth AutoZone reported last year, it's a big drop off. Other companies that have shown a similar pattern include Advance Auto Parts (NYS: AAP) , which has seen same-store sales taper off to 2.2% growth versus 9.9% in the year-ago period, and O'Reilly Automotive (NAS: ORLY) with same-store sales growth of 4.8% in its most recent quarter versus 11.5% last year. Going against increasingly tough comparisons, I'm finding it tougher to believe that the AutoZone story can continue to motor higher.
Third, earnings growth is being driven less by demand and more by increased stock repurchases. In the first quarter, AutoZone dazzled shareholders with a 24% jump in EPS. Had AutoZone not been buying back its stock over the past year and decreased the amount of outstanding shares to which its earnings are compared, shareholders would have seen just an 11% jump in earnings and not the 24% number that management dangled on a hook. Double-digit growth is still decent, but we need to look past the buybacks and see that organically, things aren't growing as quickly as the overlying figures would indicate.
Finally, management isn't exactly inspiring shareholders to want to buy stock. Over the past six months, insiders have made exactly zero purchases, yet they've sold 1.97 million shares worth of stock in 41 separate transactions. On top of this, despite producing close to $1 billion in free cash flow over the trailing 12-month period, shareholders receive no dividend whatsoever.
So once again I'm reaffirming my original call of AutoZone as an underperform on CAPS and suggesting that you, too, give the company a good hard look before it leaves you stranded on the side of the road.
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At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He barely knows how to change an air filter, let alone handle car repairs. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of General Motors and Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never needs a tune-up.
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