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AutoZone Has Reached Bargain Territory

Summary

AutoZone has fallen 9% during the last month without any piece of news to justify the plunge.

The market seems to be concerned for the effect of higher interest rates on the stock. However, higher interest rates will have only a limited negative effect.

All the growth factors of the recent past are still in place for the company.

AutoZone (AZO) has fallen 9% during the last month, from $816 to $740, while S&P (SPY) has remained essentially flat over that period. This is somewhat surprising as AutoZone rarely underperforms the market by such a wide margin. Even more surprisingly, there has been no piece of news to justify the plunge of the stock. Therefore, the big question is whether the recent plunge has presented a great bargain or investors should stay away from the stock.

While there has been no piece of news to justify the slump of the stock, the greatest part of the descent occurred last week, when the chances of an imminent hike in interest rates greatly increased. The plunge was widespread across the sector, with O'Reilly Automotive (ORLY) and Advance Auto Parts (AAP) declining as well, but the decrease was more dramatic for AutoZone. There is no doubt that higher interest rates will hurt AutoZone more than its peers due to its high debt load, which has resulted from the pronouncedly aggressive share repurchases of the last decade. As interest rates rise, the debt will be rolled over at higher rates and hence the interest expense will increase. At the moment the net debt stands at $9.8 B while the interest expense "eats" 8% of the operating income. Moreover, higher rates are likely to curtail US GDP growth, which will not bode well for all the retailers.

Nevertheless, AutoZone has posted double-digit EPS growth...


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