AutoZone’s Valuation Multiples after Its Fiscal 1Q18 Earnings
Forward valuation multiples
Valuation multiples are widely used in the auto industry to compare businesses. It’s important to note that we should only use valuation multiples to compare companies that are similar in nature in terms of size, financials, or the business model.
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AutoZone’s valuation multiples
As of December 5, AutoZone’s forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple was 9.8x. In comparison, Advance Auto Parts and O’Reilly Auto Parts’ forward EV-to-EBITDA multiples were 8.3x and 11.7x, respectively.
Likewise, AutoZone’s forward PE (price-to-earnings) ratio was 14.8x—much lower than Advanced Auto Parts’ forward PE ratio of 17.4x and O’Reilly Auto Parts’ forward PE ratio of 19.2x.
Most automakers’ (XLY) forward valuation multiples, including Fiat Chrysler (FCAU) and General Motors (GM), are lower than auto parts retailers’ forward valuation multiples. As of December 5, General Motors and Fiat Chrysler had forward EV-to-EBITDA multiples of 6.2x and 2.1x, respectively.
What could impact the valuation?
As we noted earlier in this series, unlike the auto manufacturing business, the auto parts retailing business can drive positive growth with comparatively lower investments. It lowers AutoZone’s risk profile, which should be a positive factor for its valuation.
In the last few years, AutoZone’s business has been impacted negatively by mild winters in certain parts of the US. This fiscal year, the company’s management expects normal weather patterns to return in the US, which should be positive for AutoZone’s business growth. The company’s dependence on weather patterns increases its risk profile due to uncertainties, which could also drive AutoZone’s future earnings estimates down. The lower estimates have a negative impact on AutoZone’s valuation multiples.
In the next part, we’ll discuss what Wall Street analysts recommend for AutoZone stock after its 1Q18 earnings.