Estimating The Fair Value Of AutoZone, Inc. (NYSE:AZO)

AutoZone, Inc. (NYSE:AZO), a leading retailer of automotive parts and accessories, has seen its stock price fluctuate in recent months, with analysts' price targets ranging from $2,750 to $3,950. To determine if AZO is overvalued or undervalued, we can estimate its fair value using a Discounted Cash Flow (DCF) analysis. This approach involves projecting the company's future free cash flows and discounting them to their present value.



Key Financial Metrics for AZO
To estimate the fair value of AZO, we must first consider its key financial metrics. These include:

1. Revenue Growth: AZO's revenue growth has been steady, with a 5-year average of 5.9%. However, its recent growth has slowed, with a 1.5% increase in Q2 2024 and a 0.3% increase in Q1 2024.
2. Earnings per Share (EPS) Growth: AZO's EPS growth has been strong, with a 5-year average of 13.0%. However, its recent growth has also slowed, with a 2.4% increase in Q2 2024 and a 1.2% increase in Q1 2024.
3. Return on Equity (ROE): AZZ's ROE is 14.00%, indicating a solid profitability.
4. Return on Assets (ROA): AZZ's ROA is 32.48%, demonstrating efficient use of assets.
5. Return on Capital Employed (ROCE): AZZ's ROCE is 44.08%, showing strong profitability.



DCF Analysis for AZO
To estimate the fair value of AZO, we can use a two-stage DCF model. In the first stage, we assume a higher growth rate for the next five years, followed by a stable growth rate in the second stage. We can use the following assumptions:

1. Revenue growth: 5% in the first stage, decreasing to 3% in the second stage.
2. EPS growth: 10% in the first stage, decreasing to 5% in the second stage.
3. Profit margin: 14% in the first stage, decreasing to 12% in the second stage.
4. Tax rate: 25%
5. Discount rate: 8%

Using these assumptions, we can project AZO's free cash flows for the next ten years and discount them to their present value. The estimated fair value of AZO is $3,482, which is close to its current share price of $3,373.57.



Analyst Price Targets and Consensus Estimates
Analysts' price targets for AZO range from $2,750 to $3,950, with an average of $3,601. This average price target implies an upside potential of 7.5% from the current share price. However, it is essential to consider the dispersion of analyst estimates, which is 9.1%. A higher dispersion indicates a greater degree of uncertainty in the analyst consensus.



Conclusion
Based on our DCF analysis, AZO's estimated fair value is $3,482, which is close to its current share price. While analysts' price targets suggest an upside potential of 7.5%, the high dispersion of estimates indicates a greater degree of uncertainty. Investors should consider these factors when evaluating AZO's valuation and make informed decisions based on their risk tolerance and investment goals.