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How AutoZone’s Valuation Stacks Up

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Forward valuation

Valuation multiples are widely used in the auto industry to compare businesses that are similar in nature in terms of size, financials or business model. AutoZone’s (AZO) forward valuation multiples can be compared with those of peers O’Reilly Automotive (ORLY) and Advance Auto Parts (AAP).

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AutoZone’s valuation trends

As of May 23, AutoZone’s forward EV[1.enterprise value]-to-EBITDA multiple was 8.7x, while Advance Auto Parts’ and O’Reilly’s multiples were 9.6x and 12.1x, respectively. Similarly, AZO’s forward PE ratio was 11.4x, much lower than AAP’s and ORLY’s 17.2x and 16.7x.

Most auto industry players (FXD), including Fiat Chrysler (FCAU) and General Motors (GM), had lower valuation multiples. On May 23, GM and FCAU had forward EV-to-EBITDA multiples of 7.5x and 2.3x, respectively.

Key factors to watch

As noted previously, unlike auto manufacturing, auto parts retailing can drive growth with lower investments. Therefore AZO’s risk profile should be lower, which should be positive for its valuation.

In the last couple of years, AutoZone’s sales have been impacted by mild winters in parts of the United States and weak demand across the industry. The company’s dependence on weather patterns increases its risk profile due to uncertainty, which could drive its future earnings estimates down.

In contrast, an improved comp sales growth rate in the fourth quarter could boost investors’ confidence and drive its future earnings estimates higher. These higher estimates are likely to improve AutoZone’s valuation. Continue to the next part, where we’ll find out what analysts recommend for AutoZone stock after its fiscal third-quarter earnings announcement.

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