AutoZone – Insider Actions Speak Loudly

AutoZone – Insider Actions Speak Loudly

Courtesy of Dr. Paul Price, Beating Buffett

Automobile parts retailer AutoZone [AZO] has shown a series of significant insider sales with nary an open market purchase. Company management has been retiring shares in a big way at the same time that individual officers and directors have been unloading.

This massive stock buyback has been financed by issuance of debt. As of May 5, 2012 total debt was more than $3.6 billion. This transformed AZO's book value from a positive $6.11 per share at fiscal YE 2007 to a negative $31.27 per share by August 27, 2011. It's significantly more negative on a per share basis today.

2011 10-K - Stock Repurchase Program:

During 1998, the Company announced a program permitting the Company to repurchase a portion of its outstanding shares not to exceed a dollar maximum established by the Board. The program was last amended on June 14, 2011 to increase the repurchase authorization to $10.4 billion from $9.9 billion. From January 1998 to August 27, 2011, the Company has repurchased a total of 127.3 million shares at an aggregate cost of $10.2 billion.

In fiscal Q3 (ended May 5, 2012) the company bought back 1.1 million shares at an average cost of $380 /share. AZO's 10-K details how more than 100% of net cash provided from operations has been dedicated to this program.

Officially, AutoZone has posted nothing but good news. With all- time highs in revenues and EPS you'd think insider trading would reflect bullishness. They aren't drinking the Kool-Aide. By August 15th shares have dropped more than $41 (-10.33%) since topping out at $399.10 in late April.

AutoZone's management has levered up the company while using the billions in newly issued debt to buy back shares that officers and directors were selling on the open market. A great exit strategy for them but perhaps; a warning sign for others.

AZO's enormous debt leaves little margin of error for AZO in case of another recession or even a significant industry specific slow down. Insiders haven't been waiting around to see how this play will end. Perhaps you shouldn't either.

Dr. Paul Price for RealMoneytPro