AutoZone: Performance Picks Up, Shares Still Undervalue

We do not plan a material change in our $770 fair value estimate for narrow-moat

We attribute the shares’ recent rally to heightened expectations for U.S. corporate tax reform (already incorporated into our estimates) and convergence to our view that the industry’s recent top-line slump is attributable to cyclical factors (mild weather, slower growth in miles driven, the smaller 2008-09 vehicle cohort moving into the repair sweet spot, and economic uncertainty among lower-income customers). While investors remain concerned about digital disruption, improving results throughout the sector and management commentary that the industry pricing dynamic is unchanged give us further confidence that the slump is not attributable to a structural competitive change. Management said the click-and-collect business is growing much faster than ship-to-home, which we believe reflects scaled retailers’ advantage in a do-it-yourself segment that sees motorists seek in-store personnel’s advice to confirm they have identified the right part and to obtain installation guidance even after initiating their research or purchase online.

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