AutoZone (AZO) — a Top Pick for 2023 — is a leading retailer and distributor of automotive replacement parts and accessories. It has 6,943 stores and offers national brand and private-label products, notes Taylor Conrad, an analyst with Argus Research.
According to management, more than 50% of the sales mix is private label. The margins on these private-label products are higher than on branded products because AZO is able to benefit from direct sourcing.
The auto parts sector generally benefits from an older fleet of American cars, which need more repairs. More than 80% of the U.S. auto fleet is more than four years old, with an average age of 11.9 years, according to data from the Auto Care Factbook.
The Commercial segment — which provides commercial credit and delivers parts to repair shops, dealers, service stations, and public sector accounts — represents a significant growth opportunity for AZO, which estimates that it has about 4% of this market.
Management is taking steps to increase commercial sales, including adding new 'mega-hub' locations that offer a greater assortment of parts. We see opportunities for further growth as the average age of vehicles increases and the company gains market share in the commercial segment.
The company's earnings have rebounded from their pandemic lows, and have now topped Street expectations for the past ten quarters. AZO recently reported fiscal 1Q23 results that topped consensus expectations. On the fundamentals, the shares trade at 17-times our FY24 EPS forecast, in line with the peer average.
From a technical standpoint, apart from the pandemic selloff, the shares have been in a long-term bullish pattern of higher highs and higher lows dating back to April 2018. We believe this well-managed company is positioned for further growth and are maintaining our "buy" rating. Our revised target price is $2775.