AutoZone (AZO) is one of the 4 best U.S. auto parts stocks. As the stock is currently trading at an all-time high, investors might hesitate to initiate a position in the stock. However, thanks to its exciting growth prospects and its reasonable valuation, AutoZone has the highest expected return in its peer group.

In addition, the stock is remarkably resilient during recessions. Thanks to all these features of AutoZone, investors should consider including the stock in their portfolios.

Business overview

AutoZone is the leading retailer of auto parts and accessories in the U.S. It has 5651 stores in the U.S., 568 stores in Mexico and 22 stores in Brazil.

AutoZone has an exceptional growth record thanks to the high fragmentation of its market and its exemplary business execution. The commercial automotive aftermarket is a $60 billion business and is highly fragmented. AutoZone keeps growing its number of stores thanks to the great economies of scale it enjoys and thus drives small competitors, who cannot achieve similar efficiencies, out of business.

This pattern is reflected in the performance record of the company. AutoZone grew its earnings per share at a double-digit rate for 41 consecutive quarters until early 2017. During the last decade, it has more than quintupled its earnings per share, from $10.04 in 2008 to $50.43 in 2018. Moreover, despite this tremendous growth in its earnings, AutoZone still has a market share of only 3% in the commercial automotive aftermarket. Therefore, it has ample room to keep growing for several years.

When its double-digit growth streak was interrupted in 2017, the market feared that Amazon was disrupting the business of AutoZone, as the online giant entered this market aggressively in that year by signing contracts with auto parts manufacturers. Indeed, AutoZone and O’Reilly remarkably decelerated in that year and their managements did not provide a specific reason for the deceleration. However, both companies returned to double-digit growth last year and AutoZone is poised to grow its earnings per share by 21% this year. AutoZone has thus proved the market’s concerns overblown.

Growth prospects

The impressively consistent growth record of AutoZone is a testament to the strength of its business model and its perfect execution. The retailer has been growing its earnings per share at a fast clip thanks to a series of growth drivers; opening of new stores, low-single-digit same-store sales growth, margin expansion, and share repurchases. Thanks to all these growth drivers and its still-small market share, AutoZone is likely to grow its earnings per share by at least 10% per year in the upcoming years.

It is important to note that AutoZone has one of the most successful share repurchase programs in the investing universe. The company has aggressively repurchased its shares year after year and has thus reduced its share count by 75% in the last 16 years. Most companies repurchase their shares only during good times, when stock prices are elevated, and preserve their cash during downturns. Consequently, they end up repurchasing their shares at elevated prices and thus hardly enhance shareholder value. On the contrary, AutoZone repurchases its shares aggressively during downturns and thus greatly enhances shareholder value. In the Great Recession, AutoZone was one of the extremely few companies that continued repurchasing their shares. It thus took advantage of its depressed stock price and reduced its share count by 23% in just two years. This fact is a testament to the high quality of its management.

As AutoZone spends essentially all its earnings on share repurchases, its valuation is paramount, as it determines the efficiency of the buybacks. The stock is currently trading at a price-to-earnings ratio of 15.8 and hence it can reduce its share count by 6.3%. It is thus evident that share repurchases are likely to remain a major growth driver for the foreseeable future.

Resilience to recessions

During recessions, the sales of new cars plunge and hence the average age of vehicles increases. As a result, the business of AutoZone benefits during recessions. Moreover, its stock price slumps along with the broad market. Management takes advantage of this opportunity and repurchases shares aggressively, thus enhancing shareholder value. The more the stock falls in a market sell-off, the greater the advantage from buybacks. To cut a long story short, the buyback program of AutoZone greatly enhances shareholder value during market sell-offs and thus protects the shareholders from downturns, as long as shareholders can wait patiently for the subsequent recovery.

Final thoughts

After a whole decade without a recession, it is only natural for investors to be afraid of an upcoming recession. However, as no one can predict when the next recession will show up, they should not remain on the sidelines and forgo the high long-term returns of the stock market. Instead, they should select stocks that will perform well even in the event of a downturn. AutoZone is an ideal stock for this purpose. The company is likely to continue growing its earnings per share at a double-digit rate even in the event of an economic downturn, as its business will remain robust and its aggressive share repurchases will greatly enhance shareholder value in such a scenario.