AutoZone’s slow growth rate in its Commercial segment
As we discussed in the first part of this series, AutoZone’s (AZO) fiscal 3Q17 earnings triggered a selling spree on Wall Street. The company has a stable business model, however, with low investment requirements to drive growth, as compared to the auto manufacturing business.
During its fiscal 3Q17 earnings call, while commenting on industry prospects, Bill Rhodes, AZO’s chief executive, expressed concerns about the slowing growth rate of the company’s Commercial segment.
During the call, Rhodes mentioned that in the short- to medium-term, the company might face challenges, while in the long-term, AutoZone could achieve double-digit EPS (earnings per share) growth. To achieve this growth target, Rhodes also emphasized the importance of high growth in the company’s Commercial segment.
Rhodes admitted, however, that AutoZone’s fiscal 3Q17 results were below their own expectations due to industrywide challenges and other negative macroeconomic factors.
What investors are bearing in mind
AutoZone still has a huge growth potential for the long term, given growing worldwide auto demand. Still, we can’t forget that the auto industry is cyclical in nature, and US auto sales showed signs of weakness in the first four months of 2017. Any slowdown in US auto sales also could affect the near- to medium-term growth of auto part sellers like AutoZone. For this reason, many short-term investors will likely remain cautious toward AutoZone stock.
We should note here that in April 2017, the US auto sales of all mainstream automakers (FXD) including General Motors (GM), Ford Motor (F), and Toyota Motor (TM) slid significantly. This factor could also be seen as a negative indicator for the future of the auto parts industry.
In the next part, we’ll take a look at AutoZone’s valuation multiples after its mixed fiscal 3Q17 results.