Is AutoZone (AZO) a High-Return Buy Despite Its High Debt and Aggressive Buybacks?

AutoZone (AZO) has long been a poster child for buyback-driven growth, but as its debt levels climb and valuation multiples stretch, investors must ask: Is this retail giant still a high-return bet? Let's dissect the numbers, the risks, and the rewards.

The Buyback Bonanza: A Double-Edged Sword

AutoZone's stock repurchase program has been nothing short of relentless. Since 1998, , according to GuruFocus. This has shrunk its share count by 90%, artificially inflating earnings per share (EPS) for remaining shareholders. But here's the rub: these buybacks are increasingly funded by debt. As of May 2025, . , a figure that reflects the company's heavy reliance on leverage to fuel its buyback machine.

While AZO's interest coverage ratio of 7.6x suggests it can service its debt for now, the growing leverage raises red flags. . If interest rates rise or margins compress, this debt could become a drag on growth.

Earnings Growth and ROE: A Tale of Two Eras

Historical EPS growth is impressive. . Meanwhile, its return on equity (ROE) has been abysmal. For the trailing twelve months (TTM) ending August 2025, , a stark contrast to its five-year average. This negative ROE underscores a critical issue: despite strong cash flow, AZO is struggling to generate returns for shareholders.

Yet, forecasts paint a rosier picture. , . The question is whether these projections are realistic. With , AZO is investing less in growth, which could limit its ability to drive earnings expansion.

Intrinsic Value: Overvalued or Justified?

Valuation models tell a mixed story. , . , suggesting the stock is significantly overvalued. This disconnect highlights a key risk: investors are paying a premium for future buyback-driven growth that may not materialize.

AZO's competitive advantages-its 100,000+ SKUs, 4,000+ stores, and service-oriented model-insulate it from e-commerce disruption. However, the rise of , which require fewer replacement parts, could erode margins in the long term. For now, AZO's free cash flow remains robust , but can it sustain this pace amid shifting industry dynamics?

Industry Comparisons: Leading the Pack or Falling Behind?

According to industry analysis, AZO's buyback strategy dwarfs industry averages. While rivals like O'Reilly Automotive (ORLY) and Advance Auto Parts (AAP) also repurchase shares, none match AZO's scale or consistency. This has helped AZO outperform the S&P 500 by a wide margin in recent years. According to NASDAQ analysis, AZO has outperformed the S&P 500 in recent years.

However, its financial health lags behind half of its peers in the "Auto and Home Supply Stores" sector. and suggest AZO's dominance may be waning.

The Verdict: Buy, Hold, or Walk Away?

AZO's buyback-driven strategy has been a goldmine for shareholders-until now. The company's debt load and overvaluation are cause for caution, but its cash flow generation and market position remain formidable. For aggressive investors willing to tolerate risk, AZO could still deliver outsized returns if its buybacks continue to boost EPS and its international expansion (notably in Brazil) pays off.

However, conservative investors should tread carefully. With intrinsic value estimates below the current price and ROE in negative territory, AZO's stock appears overpriced. The key will be monitoring its ability to grow earnings without further deleveraging. If the buyback machine stalls or interest rates spike, the party could end abruptly.

In the end, AZO is a high-stakes bet. It's a stock for those who believe in the power of disciplined capital allocation-even if it means dancing on the edge of a debt knife.