Autozone Case Study

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Fourth, the company could grow by means of mergers and acquisitions. AutoZone has already acquired nearly 800 stores since 1998. However, there are problems associated with this strategy. Due to the maturing industry, there were only a small number of stores left that could represent potential targets for takeover. In addition, such acquisitions could be seen as a monopoly and be prohibited by the government. So, the company would have a hard time acquiring its competitors.

I believe that AutoZone should continue with its share repurchase program. Because it has been so successful, and the stock price has increased during the program, any movement away from this could raise a red flag for investors and could cause them to lose confidence in the firm. However, the best alternative to the discontinuation of the repurchase program would be to pay back some of its mature debt and maintain its investment grade credit. And, as a portfolio manager, Johnson should continue to hold his current investments in AutoZone.

Because the company has an interest coverage ratio of 9.9x, and has remained steady over the past 5 years, it will be easier for the firm to finance the repurchase program by acquiring debt. However, if they decide to cancel the repurchase program, they will increase their credit rating by retiring their mature debt.

In addition, AutoZone’s ROIC has increased steadily with the program, meaning that the firm is capitalizing and gaining strong earnings. Finally, the down economy is keeping older cars longer on the roads, making the countercyclical nature of AutoZone’s business profitable. Because of these reasons, Johnson should continue to keep his clients’ money invested in AutoZone.

Questions

- Overall, AutoZone’s stock price had performed very well over the past 5 years. In 2007 to 2011, the stock price saw a steady increase. However, in 2010 and 2011, the stock price increased substantially. The steady growth from 2007 to 2011 is because its sales growth which grew from 5.7% in 2008 to 9.65% in 2011, the EPS which grew from $8.53 in ‘07 to $19.47 in ‘11, and the share repurchase program. Along with these factors, the acquisitions and aggressive growth strategy led to their large increase in stock price from 2010 to 2011.

- A stock repurchase program is where a company uses its cash flows to buy back its own shares of stock, which is known as treasury stock. After repurchased, the overall ownership of each shareholder outstanding will increase because there are fewer shares outstanding. Companies would use this in two ways: a tender offer and open market. When using a tender offer, shareholders will be offered a price at a premium to sell their shares back to the company, and they get the choice of selling. When buying back shares in the open market, the company simply buys shares at their market value.

A share repurchase program will positively affect EPS. Because there are fewer shares outstanding after the repurchase, EPS grows. Also, investors look for companies with high EPS, so they are willing to pay a higher price for that stock, further increasing the price.

ROIC is also positively affected by a share repurchase program. ROIC measures how efficient investor capital is being used and the company's performance After a repurchase of shares, there is less capital, which in turn means that the ROIC percentage will increase.

- I believe that the share repurchase program played a big part in the increase in stock price. As mentioned earlier, the stock price had increased 1250% from 1998 to 2011; most of this increase was seen during the repurchase program. The largest success factor of this program was the increase of the EPS by 85%, which increased investor confidence, and increased the stock price by pushing the demand for the stock higher.

- I believe that AutoZone should continue with the repurchase program as well as pay off its current mature debt. First, because canceling the program could decrease investor confidence. Second, paying its debt will maintain their excellent investment grade credit. Third, because the repurchase program has increased the EPS by 85%, therefore, increasing demand of the stock.

- Johnson should keep his holdings in AutoZone. The three reasons are that EPS has been steadily increasing, the stock price has been consistently growing, and the ROIC has been consistently increasing. Although Lampart is selling his stake in the company, it does not mean that the company will start performing badly, so that is not a reason to sell his own stake in the company.