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AutoZone's Incredible Shrinking Shares

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Ivan Martchev for InvestorPlace

NEW YORK (InvestorPlace) -- At the end of the latest reported quarter, auto parts retailer AutoZone (AZO) had 38.95 million shares outstanding.

This number means little on its own, but when you consider than since 1998 the company has meticulously been repurchasing stock every year and in the process has managed to retire 128.8 million shares, you should take notice.

"Here comes AutoZone with yet another buyback," I thought, as the headline about the latest board authorization to repurchase $750 million worth of stock appeared on my computer screen.

I had known about AutoZone's regular buybacks for some time, but I had not considered the cumulative number of shares retired.

When I looked at it, I was surprised to see that management had retired 70% percent of shares outstanding since this rather interesting financial experiment began nearly 14 years ago.

Also See: Spring Cleaning for Financials: 2 to Sell, 2 to Buy

Any company's share price should feel the disappearance of more than two-thirds of the float, even if business stays flat.

In this case, AutoZone grew notably as the number of shares shrank dramatically.

Management did a lot to break into new commercial markets, which resulted in an acceleration of sales growth.

Over the past 10 years sales show a compounded annual rate of growth of 5.3%, a five-year CAGR of 6.3% and a three-year CAGR of 7.3%.

Because the share count shrank consistently as the company grew, earnings per share growth was much higher than any other measure of profit growth. This is why EPS show a 10-year CAGR of 23%, while earnings before interest and taxes (EBIT) has a 10-year CAGR of 6.3%.

"So why doesn't everyone do what AZO does?" I was asked when discussing AZO's above-mentioned strategy.

If one looks at other companies in the same industry, one discovers that AZO has the highest year-over-year revenue growth (8.6%), the highest gross margin (51.22%) and the highest operating margin (18.67%).

Yet AutoZone's shares are not valued higher than the industry average. They have a price-to-earnings ratio of 17.66 based on trailing earnings and a P/E of 14 based on forward earnings. It doesn't appear that anyone else in the industry has the cash flow to try to shrink shares so aggressively.

Also See: 'Dark Pools,' Low Liquidity Cast Shadow on the Rally

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