AZO - Autozone

[Phaceliacapital]

Why the preference for GPC & AZO instead of ORLY & AAP?

[DooDiligence]

Why the preference for GPC & AZO instead of ORLY & AAP?

 

I kinda wanted to cover both DIY & commercial.

 

ORLY seems to have the best mix of DIY & DIFM which is probably why they look a bit expensive in comparison to AZO (PE, etc.) & to be totally honest, I'm attracted to AZO's huge historical buybacks (not necessarily skating towards the puck here.)

 

AZO & AAP are mostly DIY & are trying to break into commercial.

GPC already serves a big segment of commercial with less DIY.

 

I'm a bit distressed by AZO reporting a 2% decrease in e-commerce last Q & which they don't seem to see as a problem. Instead, they're focused on mega hubs & garnering more commercial business (is this the best way to fend off Amazon or should they work on their e-platform?) (if they can compete effectively against B & M comps, is that sufficient to stay relevant in an Amazon world?)

 

I also don't like the way they cited the weather & late tax refunds for a slow Q while GPC posted gains & I believe they operate in similar geographies.

 

I knew all of this before I bought & yet, I keep glaring at those buybacks (the fool in the end.)

 

Volvo announced that all their new vehicles will have a drive motor starting in 2019 (straight EV or hybrid.)

 

https://www.thestreet.com/story/14238985/1/here-s-walmart-s-next-target-as-it-tries-to-beat-off-amazon-a-5-000-store-auto-parts-retailer.html

(as if the Amazon threat & the imminent demise of ICE wasn't enough)

 

-----

 

I just realized that I can't solidly answer your question & am resorting to flawed assumptions...

[DooDiligence]

I just had a thought.

 

Bulls tout the need for local service & expertise and yet only Pep Boys actually has service bays (should this give them an advantage?)

 

(Uncle Carl appears to think so)

 

http://www.searchautoparts.com/aftermarket-business/opinion-commentary-distribution/automotive-aftermarket-life-imitates-board-game?page=0,0

 

GPC & ORLY would be antagonizing their commercial customers.

 

AZO & AAP are pursuing commercial & don't seem inclined to add service bays.

 

Is it anything?

 

(edit: there are NAPA service centers - have to read up)

 

[kab60]

Nothing fancy but SSS increased 1% in the Q4 quarter. Seems like decent results. I still think it's cheap and even more so when one thinks about where we might be in the cycle (both in regards to the overall economy and the number of vehicles in AZO's sweetspot) and how the Company has shown a willingness to behave aggressively during market dislocations.

 

http://nocache-phx.corporate-ir.net/phoenix.zhtml?c=76792&p=irol-newsArticle&ID=2301440

[kab60]

Another set of strong results. SSS increased 2,3 pct. I only wish they'd buyback more shares, but that's a minor issue. Reduced outstanding shares 5 pct. y/o/y.

 

http://phx.corporate-ir.net/phoenix.zhtml?c=76792&p=irol-newsArticle&ID=2321048

[DooDiligence]

Another set of strong results. SSS increased 2,3 pct. I only wish they'd buyback more shares, but that's a minor issue. Reduced outstanding shares 5 pct. y/o/y.

 

http://phx.corporate-ir.net/phoenix.zhtml?c=76792&p=irol-newsArticle&ID=2321048

 

Cannibal, love it!

 

I own GPC too with their focus on DIFM & the owner / operator model.

[flesh]

I just had a thought.

 

Bulls tout the need for local service & expertise and yet only Pep Boys actually has service bays (should this give them an advantage?)

 

(Uncle Carl appears to think so)

 

http://www.searchautoparts.com/aftermarket-business/opinion-commentary-distribution/automotive-aftermarket-life-imitates-board-game?page=0,0

 

GPC & ORLY would be antagonizing their commercial customers.

 

AZO & AAP are pursuing commercial & don't seem inclined to add service bays.

 

Is it anything?

 

(edit: there are NAPA service centers - have to read up)

 

im with icahn and arlington on this one.... seeing the move to the mnro's of the world as opposed to the azo's. Sprained wrist.... excuse the typing.

 

Long mnro. 35% tax payer to boot.

[DooDiligence]

I just had a thought.

 

Bulls tout the need for local service & expertise and yet only Pep Boys actually has service bays (should this give them an advantage?)

 

(Uncle Carl appears to think so)

 

http://www.searchautoparts.com/aftermarket-business/opinion-commentary-distribution/automotive-aftermarket-life-imitates-board-game?page=0,0

 

GPC & ORLY would be antagonizing their commercial customers.

 

AZO & AAP are pursuing commercial & don't seem inclined to add service bays.

 

Is it anything?

 

(edit: there are NAPA service centers - have to read up)

 

im with icahn and arlington on this one.... seeing the move to the mnro's of the world as opposed to the azo's. Sprained wrist.... excuse the typing.

 

Long mnro. 35% tax payer to boot.

 

I’m so glad that I don’t delete posts & thanks for reminding me.

 

I’m sitting on a 40% gain in AZO & walked into one of their stores a while back & remember 3 walls of retail space devoted to oil & lubricants.

 

Crap, I am a flip flopper.

[mwtorock]

have not really looked into mnro in details. would the kind of business with service bays do better than the big four?  The cheapest for services is probably DIY - like AZO, no labor costs, etc. The most expensive is going to dealers for services, which some argue are going to be the norm as cars get more automated/smarter. how are the Pep Boys going to shine in the middle? what kind of advantages they have to compete in the long run?

[kab60]

I just had a thought.

 

Bulls tout the need for local service & expertise and yet only Pep Boys actually has service bays (should this give them an advantage?)

 

(Uncle Carl appears to think so)

 

http://www.searchautoparts.com/aftermarket-business/opinion-commentary-distribution/automotive-aftermarket-life-imitates-board-game?page=0,0

 

GPC & ORLY would be antagonizing their commercial customers.

 

AZO & AAP are pursuing commercial & don't seem inclined to add service bays.

 

Is it anything?

 

(edit: there are NAPA service centers - have to read up)

 

im with icahn and arlington on this one.... seeing the move to the mnro's of the world as opposed to the azo's. Sprained wrist.... excuse the typing.

 

Long mnro. 35% tax payer to boot.

I too like Monro and the private to public multiple arbitrage/roll up strategy, but I'm not really sold on valuation. It's a bit cheaper than where it has traded historically, but you have new management, lower ROIC/worse ROE (than Azo) and perhaps more competition from Pepboys now (when doing M&A).

 

Autozone har run up pretty fast, but I really like management. They've had every chance to say they were struggling with ecommerce, if that was the case, and they haven't. On the last Q they talk about how they expect gross margin to improve going forward. Their mega hub strategy also seems to help their commercial sales, so there's growth apart from share buybacks.

 

I think it was a very easy pick at 500, now less so, but probably still too cheap. Really curious to hear about your case for Monro and how you think about it valuation wise if you don't mind.

[DooDiligence]

I like GPC's chances of survival better.

Owner operators will defend their businesses a lot better than salaried managers.

 

http://www.orlandosentinel.com/news/politics/political-pulse/os-gambling-special-session-deal-20180425-story.html

[Okonomen]

When has this become a talk about survival for AZO? They are posting positive SSS, 200 annual net openings with 0 closings, +30% ROIC, extremely aggressive share buybacks and a great price at the moment. Great biz if u ask me :- ) But I am also a biased shareholder

[DooDiligence]

When has this become a talk about survival for AZO? They are posting positive SSS, 200 annual net openings with 0 closings, +30% ROIC, extremely aggressive share buybacks and a great price at the moment. Great biz if u ask me :- ) But I am also a biased shareholder

 

No argument there.

I just have trouble wrapping my head around the whole negative owners equity thing.

And the narrative re: EV Kills ICE -> I like the owner / operator model better

[Okonomen]

What is wrong with owner equity? They have an extremely strong earning power in a macro and online resilient B&M model. You are looking at the book values like a Graham investor when you should look at the economic unobservable value which is not shown in the balance sheet's asset side. In my opinion its not something to worry about. They incurred the debt around the time of the financial crisis and used it to buy back stock which I think just shows how great the mgmgt is

[DooDiligence]

What is wrong with owner equity? They have an extremely strong earning power in a macro and online resilient B&M model. You are looking at the book values like a Graham investor when you should look at the economic unobservable value which is not shown in the balance sheet's asset side. In my opinion its not something to worry about. They incurred the debt around the time of the financial crisis and used it to buy back stock which I think just shows how great the mgmgt is

 

You are correct, and I would hazard to guess that you are under 30 years of age?

 

I am 55 years old and just finishing my 1st of 8 semesters at college.

 

I am being very choosy about what I buy & why, which includes timing cash flow needs for the next 4 years.

Any cash I deploy towards equities needs to look like an obvious "front run" (citation needed) to me. Example, CHTR, DIS, SFTBY)

 

Notice that I said "needs to look like that to me."

 

The amount of front run I get needs to be perfect & I may be inadequate to the task.

[Okonomen]

I am almost 30 but I don't think there is any financial risk in AZO having negative BV. It's just a matter of capital structure. They have an immense earning power to cover all obligations. Personally I am also extremely risk averse when it comes to debt and gearing, but if AZO's true assets - regardless of GAAP measures - were to be recognized on the balance sheet, they would have billions of USD in equity ^^

[DooDiligence]

I am almost 30 but I don't think there is any financial risk in AZO having negative BV. It's just a matter of capital structure. They have an immense earning power to cover all obligations. Personally I am also extremely risk averse when it comes to debt and gearing, but if AZO's true assets - regardless of GAAP measures - were to be recognized on the balance sheet, they would have billions of USD in equity ^^

 

I apologize if I offended you with the age thing.

I really am just flying by the seat of my pants and

trying to use all the info I can get from strangers like yourself.

 

Thanks

[Spekulatius]

What is wrong with owner equity? They have an extremely strong earning power in a macro and online resilient B&M model. You are looking at the book values like a Graham investor when you should look at the economic unobservable value which is not shown in the balance sheet's asset side. In my opinion its not something to worry about. They incurred the debt around the time of the financial crisis and used it to buy back stock which I think just shows how great the mgmgt is

 

You are correct, and I would hazard to guess that you are under 30 years of age?

 

I am 55 years old and just finishing my 1st of 8 semesters at college.

 

I am being very choosy about what I buy & why, which includes timing cash flow needs for the next 4 years.

Any cash I deploy towards equities needs to look like an obvious "front run" (citation needed) to me. Example, CHTR, DIS, SFTBY)

 

Notice that I said "needs to look like that to me."

 

The amount of front run I get needs to be perfect & I may be inadequate to the task.

From the stocks you own, ABEV, CVS and CHTR will have negative tangible equity as well, which I think is the same than negative owner equity.

[Cigarbutt]

Even Boeing is going towards negative total equity.

Interesting take on the need to measure "enhanced" book value.

http://www.osam.com/Commentary/negative-equity-veiled-value-and-the-erosion-of-price-to-book

 

Have followed ORLY and AZO for a long time. Those names were high on the list in 2008-9.

I would say that both have been well managed and have developed increasing market share in an increasing market and moat is somewhat related to the scale of their distribution platform.

 

The high and persistent profitability and low interest rates environment have allowed an amazing amount of cannibal behavior which explains the negative equity at AZO and the "veiled" equity at ORLY. These stocks are potential value plays but may look like growth stocks because of the balance sheet "distortions".

 

Some numbers (numbers look right but borrowed from an article dealing with buybacks, 5-year period, Q4 2012 to Q4 2017).

 

Company    return on buybacks, annualized    $ amount buyback over end market cap    change in share count

ORLY                          6,9%                                                32,3%                                        (25,2%)

AZO                          3,6%                                                32,5%                                        (25,4%)

 

The returns on buybacks for both has been better before the last 5-year period and the last 5-year return reflects the relative poor performance of share price in the last few years but this may reflect a contrarian opportunity if the market rerates the long term moat going forward.

 

Opportunity?

 

By inverting, how would go about to create a situation that would allow the setup of an oligopoly made of a few prominent retailers selling relatively commoditized products where the moat is based largely on distribution and resulting in very high returns on capital giving rise to the possibility of cannibalizing share count using high debt?

 

Isn't there, somehow, an unusual hindrance to competitive powers?

Will debt always remain this cheap?

 

 

 

[Okonomen]

@DooDiligence: Hehe no worries : ) The negative BV for AZO is caused by their extreme buybacks through the years, hence my point on the capital structure.

[DooDiligence]

@DooDiligence: Hehe no worries : ) The negative BV for AZO is caused by their extreme buybacks through the years, hence my point on the capital structure.

 

Someone told me before, what you & Spekulatius are saying about buybacks & neg equity.

If all you big money heads say that it doesn't matter, then i'm sure it must be true, but I'm just stupid like that.

I need to read Graham & Dodd again, or something that gels this BS equity concept into my brain...

[mwtorock]

@DooDiligence: Hehe no worries : ) The negative BV for AZO is caused by their extreme buybacks through the years, hence my point on the capital structure.

 

Someone told me before, what you & Spekulatius are saying about buybacks & neg equity.

If all you big money heads say that it doesn't matter, then i'm sure it must be true, but I'm just stupid like that.

I need to read Graham & Dodd again, or something that gels this BS equity concept into my brain...

 

Yeah, these accounting numbers always play tricks on me. But this is not a liquidation or distressed situation, so neg BV is not a concern yet. If I remember correctly, the cig giants used to have neg book value too due to buying back stocks using debt. They did pretty well in the last decade.

 

AZO is even better than that because major capital is from AP, which is interest free. It is somewhat similar to insurance float, which you will give back someday after you used it for free for many days/months/years. Only thing is AZO management cant invest in stocks.

[Okonomen]

@DooDiligence: Negative BV will always look bad in a Graham investors eyes but that's mainly because Graham focused a lot on balance sheet numbers and liquidation value as a downside protection. I think that's a pretty narrow view of the investing universe and a Graham investor probably thinks that all companies with negative BV's are about to go bankrupt or something. A liquidation value will never become relevant for companies such as McDonalds, Autozone etc. They have tremendous value in their business models and earning power.

 

Book value of equity is just the value of all the quantifiable and measurable assets, i.e. cash, buildings, equipment, inventory, excess pay for acquisitions (goodwill which is in fact also just air but can boost equity) etc excluding obligations. However, something such as economic goodwill or in other words the value of the strong business model and its moat will never be stated on the asset side because it is more or less unobservale (but you can see it in the strong recurring earnings), but these unobservable assets is what generates a lot of the earning power. In such case it would be kind of waste of capital to have low debt and never buy back shares just to have a high book value of equity.

 

In short, a strong moaty business in a non-cyclical industry with highly recurring earnings doesn't require a lot of equity

[DooDiligence]

@DooDiligence: Hehe no worries : ) The negative BV for AZO is caused by their extreme buybacks through the years, hence my point on the capital structure.

 

Someone told me before, what you & Spekulatius are saying about buybacks & neg equity.

If all you big money heads say that it doesn't matter, then i'm sure it must be true, but I'm just stupid like that.

I need to read Graham & Dodd again, or something that gels this BS equity concept into my brain...

 

Yeah, these accounting numbers always play tricks on me. But this is not a liquidation or distressed situation, so neg BV is not a concern yet. If I remember correctly, the cig giants used to have neg book value too due to buying back stocks using debt. They did pretty well in the last decade.

 

AZO is even better than that because major capital is from AP, which is interest free. It is somewhat similar to insurance float, which you will give back someday after you used it for free for many days/months/years. Only thing is AZO management cant invest in stocks.

 

I see your point regarding a "floaty" pile of capital.

It seems like all of the vendors for AZO,GPC, ORLY & that other one, are in the same position of having to give generous terms.

I remember someone commenting on this very same phenom asking, "what would happen, in a downturn, if vendors suddenly grabbed all the power?"

 

IDK, it just boils down to my limited ability to 2nd level think.

I like the owner / operator model better.

 

Hey, it might be interesting to find a vendor with a super short payment cycle?

Maybe they produce certain parts which are fast movers & are hard to get?

[DooDiligence]

@DooDiligence: Negative BV will always look bad in a Graham investors eyes but that's mainly because Graham focused a lot on balance sheet numbers and liquidation value as a downside protection. I think that's a pretty narrow view of the investing universe and a Graham investor probably thinks that all companies with negative BV's are about to go bankrupt or something. A liquidation value will never become relevant for companies such as McDonalds, Autozone etc. They have tremendous value in their business models and earning power.

 

Book value of equity is just the value of all the quantifiable and measurable assets, i.e. cash, buildings, equipment, inventory, excess pay for acquisitions (goodwill which is in fact also just air but can boost equity) etc excluding obligations. However, something such as economic goodwill or in other words the value of the strong business model and its moat will never be stated on the asset side because it is more or less unobservale (but you can see it in the strong recurring earnings), but these unobservable assets is what generates a lot of the earning power. In such case it would be kind of waste of capital to have low debt and never buy back shares just to have a high book value of equity.

 

In short, a strong moaty business in a non-cyclical industry with highly recurring earnings doesn't require a lot of equity

 

OK, so its not like a bank or an insurer which must reserve and as long as the business has a lot of runway, it's all good?

 

I've always struggled with understanding the application of leverage, you've made it a bit less muddy.

 

I'll ponder...