AutoZone: A 'Rare Rate Hike Beneficiary'

Bank of America Merrill Lynch added AutoZone, Inc. AZO to its U.S. 1 list (of top investment ideas) on Thursday. According to the report, analysts Denise Chai and Curtis Nagle give the stock a Buy rating and $865.00 price target “in an environment where S&P 500 earnings growth appears to have stalled and investors are uncertain around the macro outlook (oil, USD strength, interest rates).”

In this context, the experts believe AutoZone provides investors with the opportunity to own “a defensive, secular domestic growth story where earnings growth should continue to benefit from” two main elements: (1) a helpful macro background of surging miles driven and a record-old vehicle fleet and (2) distribution initiatives that should drive faster growth in comps.

A Rare Beneficiary Of The Rate Hike

Savita Subramanian, BofAML’s head of U.S. equity strategy, has selected AutoZone as one of the top companies in the S&P 500 for predictability and consistency. In fact, the company has managed to beat earnings consensus expectations every quarter since at least 2010.

The firm sees the auto parts retailer as “a rare beneficiary of higher interest rates” given:

1) Vast pricing power (50+ percent gross margin) enables it to pass on more elevated costs to customers.

2) Inflation (absent for several years now) would benefit ticket, comps and SG&A leverage.

3) AutoZone is “Investment Grade with low leverage and very low cost of funds and fixed long-term debt, so it is less exposed to higher rates.”

4) The company enjoys strong vendor support, and an AP/inventory ratio of 111 percent. On the other hand, small competitors would have a much lower AP/inventory ratio; this makes them considerably more vulnerable to higher rates.

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