Valuation multiples are widely used in the automobile and auto parts industries to compare businesses. It’s important to only use valuation multiples to compare companies that are similar in terms of size, business model, or financials. In this fashion, AutoZone’s (AZO) forward valuation multiples can be compared (XLY) with its peers O’Reilly Automotive (ORLY) and Advance Auto Parts (AAP).
AutoZone’s valuation multiples
On September 19, AutoZone’s forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple was 9.9x. In comparison, the forward EV-to-EBITDA multiples of Advance Auto Parts and O’Reilly Auto Parts were much higher at 12.0x and 14.4x, respectively.
Similarly, AZO’s forward PE (price-to-earnings) ratio was 13.1x, much lower than AAP’s forward PE ratio of 21.7x and ORLY’s forward PE ratio of 20.0x.
The forward valuation multiples of most auto industry players (FXD), including Ford (F) and General Motors (GM), were lower than those of the major auto parts retailers. On September 19, GM and Ford had forward EV-to-EBITDA multiples of 8.1x and 13.3x, respectively.
Key factors to watch
Unlike the auto manufacturing business, the auto parts retailing business can drive positive growth with comparatively lower investments. As a result, AZO’s risk profile is lower and its valuation multiples are higher than those of the major automakers.
In the previous couple of years, AutoZone’s sales were negatively affected by mild winters in some parts of the United States and the industrywide weak demand. However, auto part retailers have reported improvement in demand in the last two quarters.
An improvement in AZO’s comp sales growth rate in the first quarter of fiscal 2019 could boost investors’ confidence and its earnings estimates. These higher estimates are expected to have a positive impact on AutoZone’s valuation multiples.
Read on to the next part to see what Wall Street analysts are recommending for AutoZone stock after its earnings event for the fiscal fourth quarter.