Forward valuation multiples
Valuation multiples are widely used in the auto industry to compare similar companies in terms of size, financials, or business model. AutoZone’s (AZO) forward valuation multiples can be compared with those of peers such as O’Reilly Automotive (ORLY) and Advance Auto Parts (AAP).
AutoZone’s valuation trends
As of March 5, AutoZone’s forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple was 9.2x. In comparison, Advance Auto Parts and O’Reilly Auto Parts had forward EV-to-EBITDA multiples of 9.3x and 11.8x, respectively.
Likewise, AZO’s forward PE (price-to-earnings) ratio was 12.4x, much lower than AAP’s forward PE ratio of 16.9x and ORLY’s 16.2x.
Most auto industry players (XLY), including Fiat Chrysler (FCAU) and General Motors (GM), had lower valuation multiples than auto part retailers. As of March 5, GM and FCAU had forward EV-to-EBITDA multiples of 7.0x and 2.2x, respectively.
Key factors to watch ahead
As noted earlier in this series, unlike auto manufacturing, auto part retailing can drive growth with lower investments. As an auto part retailer, AutoZone is more likely to have a lower risk profile, which should be a positive factor for its valuation.
In the last couple of years, AutoZone’s business has been impacted by mild winters in parts of the United States. In fiscal 2018, the company expects normal weather patterns to return, which should be positive for AutoZone’s business growth. The company’s dependence on weather patterns increases its risk profile due to uncertainties and could drive its future earnings estimates down. Lower estimates impacted AZO’s valuation. In the next part of this series, we’ll discuss Wall Street analysts’ recommendations for AutoZone stock.