Is AutoZone’s Strong Rally Justified After Recent Earnings Beat?

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If you are watching AutoZone’s stock and wondering what your next move should be, you are definitely not alone. The auto parts retailer has delivered steady gains, with shares up nearly 30% over the past year and an impressive 86% over three years. That kind of sustained growth tends to get investors’ attention, especially with AutoZone’s consistent revenue and income increases showing through in the numbers. But with the stock recently closing around $4,158, right at most analysts’ price targets, the big question now is whether there is still enough value and upside to justify jumping in at these levels.

Recent volatility in the retail sector and cautious optimism about consumer demand have contributed to some of the stock’s moves upward. However, there is more happening beneath the surface. On one hand, AutoZone’s fundamentals look solid. On the other hand, its valuation is only checking one box out of six for being undervalued based on common analyst methods, giving it a valuation score of 1 out of 6. This suggests that while the company is strong, its shares may not be the ultimate bargain some investors are hoping for.

So, how do different valuation models line up for AutoZone, and do those numbers tell the full story? In the next section, we will break down those approaches. Be sure to stick around, because there is an even more insightful way to look at valuation that we will share at the end of the article.

AutoZone delivered 29.9% returns over the last year. See how this stacks up to the rest of the Specialty Retail industry.

Approach 1: AutoZone Cash Flows

The Discounted Cash Flow (DCF) model estimates a company’s value by projecting future free cash flows and discounting them back to their value today. This approach helps investors gauge whether the current stock price reflects the underlying earning power of the business.

For AutoZone, the latest twelve months generated free cash flow of $2.16 billion. Analysts expect this cash flow to grow, with projections reaching roughly $3.78 billion in 2035. By averaging this steady rise, the DCF model produces an intrinsic fair value of $3,081.75 per share.

AutoZone’s stock is currently trading around $4,158, which is about 34.9% above its DCF-based intrinsic value. This suggests that, according to the cash flow projection approach, the stock is 34.9% overvalued at this time. Despite its reliable cash generation, AutoZone’s growth appears to be more than priced in at current levels.

Result: OVERVALUED

Our DCF analysis suggests AutoZone may be overvalued by 34.9%. Find undervalued stocks based on DCF analysis or create your own screener to find better value opportunities.

Approach 2: AutoZone Price vs Earnings (PE)

The price-to-earnings (PE) ratio is a foundational tool for evaluating established, profitable businesses like AutoZone. This metric gives investors a quick way to see how much they are paying for each dollar of the company’s earnings. In sectors where profits are predictable and recurring, the PE ratio is particularly useful for comparing companies on a like-for-like basis.

It is important to remember that what counts as a “fair” PE ratio can shift depending on growth prospects and risk. Companies with stronger earnings growth or more stability typically have a higher PE, while those facing headwinds or uncertainty might trade at a lower multiple. The context provided by industry averages and direct peers is essential when interpreting these numbers.

Currently, AutoZone trades at a PE ratio of 27.1x. This is considerably higher than the Specialty Retail industry average of 18.6x, yet still below the average among large direct peers at 36.1x. The Fair Ratio, which factors in AutoZone’s specific earnings growth, profit margins, and risks, is 18.9x. When comparing the Fair Ratio with the current PE, AutoZone is trading at a materially higher multiple than what would be justified by its fundamentals. This suggests the shares are more than fully valued by this measure.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your AutoZone Narrative

Instead of focusing on just the numbers, Narratives offer a bigger-picture approach to investment decisions by connecting your personal story or perspective about a company to a tailored financial forecast and, ultimately, to a fair value estimate.

A Narrative is simply your chosen outlook or “story” for AutoZone. You might believe its international expansion and tech upgrades will drive strong growth, or you may be concerned that margin pressures and rising costs will limit upside. Narratives guide you through making assumptions about revenue, earnings, and profit margins, helping you estimate what AutoZone is really worth based on your viewpoint.

Within the Simply Wall St platform’s community of millions of investors, Narratives are quick and accessible to create, and they update automatically as new events such as earnings reports or news emerge. This makes it easier to decide when to buy or sell by comparing your Fair Value to the current share price, all in real time.

For example, one investor’s Narrative might confidently set AutoZone’s Fair Value as high as $4,850, while another with a more cautious outlook might value it at $2,900. Which story makes more sense to you?

Do you think there's more to the story for AutoZone? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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