Why AutoZone Isn't Taking the Fast Lane to a Stock Split

NEW YORK (TheStreet) -- AutoZone (AZO) was once on my list of high-priced stocks likely to split. Shares traded as high as $561.62 on Feb. 12. They have since corrected back to $532, its Wednesday close, up over 11% for the year to date.

I don't think it should split now, however. Although a split would bring the price down from its current level, it would also increase volatility in a company whose management is determined to increase earnings and whose largest shareholders hate volatility but love AutoZone's stock buybacks.

AutoZone is the leading retailer and distributor of automotive replacement parts and accessories in the United States. It doesn't pay a dividend, but it is proactive in growing the company's stock price. Most recently, the Board of Directors authorized the repurchase of an additional $750 million of the company's common stock as part of its ongoing share repurchase program.

Since 1998 AutoZone's Board has authorized nearly $15 billion in stock buybacks. That's impressive for a company whose market cap is only $17.3 billion, and it sends investors a positive message.

The company has increased its buyback program nearly every quarter the past 15 year because it generates more operating income than it needs to grow and maintain its business. That gives AutoZone plenty of free cash to continue purchasing its shares.

Doing this creates what I call a "stealth dividend" for shareholders. Share buybacks lift the stock price by lowering the number of shares outstanding.

So why split its stock?

The main benefit would be to reduce the share price below $100 so more retail investors and funds could afford to own AZO. This would take a stock split similar to what Apple (AAPL) did.

The downside of, for example, a 6-for-1 split is that with six times as many shares trading the volatility of AutoZone's stock would increase. Company management and investors, most of which are large institutions like Vanguard and Fidelity, aren't used to dealing with volatile daily trading.

About 98% of the company's outstanding shares are owned by institutions and mutual funds that, I've learned, prefer the company's strategy of consistent earnings growth and using free cash flow for stock buybacks.

The bottom line is there are no big shareholders who want a stock split.

Let's look at a five-year price chart that demonstrates two key metrics that elevated AZO to where it's at today without any splits.

AZO Chart
AZO
data by YCharts

From below $150 per share in late 2009 to over $532 today, shares of AutoZone have performed sensationally.

Since AutoZone buys back about 9% of its stock every year, investors are used to the price rising along with earnings. Although the company has the highest share price in the industry, it doesn't have the highest price-to-earnings multiple.

Shares of its competitor Advanced Auto Parts (AAP) sell with a trailing 12-month PE of 22 versus AZO's 17. Advanced has grown by acquisitions while AutoZone prefers an organic growth strategy.

Management appears determined to steadily increase company earnings. In spite of its conservative management style it aims for nearly a 15% annual EPS growth rate.

Although AutoZone acts more like a tortoise than a hare, it knows how to win the race. With a 19% operating margin and operating cash flow of $1.5 billion, it generates plenty of free cash to continue its generous stock buyback program.

Leave well enough alone.

At the time of publication the author had a position in AAPL.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.


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>>Take a Look at the New Ford Edge TheStreet Ratings team rates AUTOZONE INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate AUTOZONE INC (AZO) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, expanding profit margins, good cash flow from operations, solid stock price performance and impressive record of earnings per share growth. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • AZO's revenue growth has slightly outpaced the industry average of 2.1%. Since the same quarter one year prior, revenues slightly increased by 6.2%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The gross profit margin for AUTOZONE INC is rather high; currently it is at 54.46%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 12.17% is above that of the industry average.
  • Net operating cash flow has increased to $463.15 million or 20.29% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -3.54%.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 25.48% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, although almost any stock can fall in a broad market decline, AZO should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • AUTOZONE INC has improved earnings per share by 16.4% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, AUTOZONE INC increased its bottom line by earning $27.88 versus $23.57 in the prior year. This year, the market expects an improvement in earnings ($31.56 versus $27.88).

Marc Courtenay is a financial research analyst and the founder of Advanced Investor Technologies LLC as well as the publisher and editor of www.ChecktheMarkets.com.

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