CASE 3: AUTOZONE ELECTRONICS
I. Case Context
AutoZone is in the process of offering shares to the public for the first time via an Initial Public
Offering. Patrick AutoZone, the owner and his financial vice president are meeting with their
investment banker to set the price of the IPO.
II. Problem Definition
As the financial vice president of AutoZone Electronics, what price can we recommend to Patrick
AutoZone?
III. Analysis
IV. In order to fully understand the value that is generated through a stock repurchasing program, it
is important to comprehend the financial ratios that will be discussed in this case analysis. (See
Table 1.1)
V. Table 1.1 Financial Ratio | Formula | Use |
VI.
VII. Return on Total Assets | Net Income available to CS ÷ Total Assets |
VIII. Measure of how well management is using its assets to generate earnings
IX.
X. Return on Common Equity | Net Income available to CS ÷ Common Equity |
XI. Stockholders invest in order to garner a return, this tells how well they are doing in an accounting
sense
XII.
XIII. Price/Earnings Ratio | Price Per Share ÷ Earnings Per Share |
XIV. How much investors are willing to pay per dollar of reported profits
XV.
XVI. Earnings per Share | (Net Income - Preferred Dividends) ÷ Total Shares Outstanding
XVII. Portion of a firm's profits allocated to each outstanding share of common stock, a measure of
profitability
XVIII.
XIX. Return on Invested Capital | (Net Income - Dividends) ÷ Total Capital
XX. Assesses a company's efficiency at allocating the capital under its control to profitable
investments
IV. Conclusion and Recommendation
AutoZone stock also remains cheap. The equity trades at a price-to-earnings (PE) ratio of 15.
This is lower than its three main competitors. Also, of its direct peers, only GPC showed a higher
level of sales growth in the previous quarter.
Unfortunately for AutoZone stock investors, the equity appears to hold a low valuation for a
reason. As I mentioned after the previous quarterly earnings report, the current ratio remains a
concern. Once again, the company’s current liabilities exceed the value of its current assets. The
gap between current assets and liabilities narrowed from the last quarter. It stands at about
$1.2 billion now. The book value also remains negative, coming in at -$1.565 billion. And as in
the last quarter, the debt and accounts payable liabilities almost match the value of the
company’s total assets.
Decisions at the top are the likely reason for the negative book value. AutoZone’s leaders appear
to prioritize stock buybacks over the company’s financial stability. Shares outstanding fell to
27.35 million, down from 27.49 million. The buybacks seem to have had little long-term impact.
With the fall in the stock price after the earnings report, the stock trades only modestly higher
than it did after the last earnings report.
Moreover, the negative book value may force a resale of some of that stuck at much lower
prices if events force the company to shore up its balance sheet. While new buyers would enjoy
the likely discount such a move would bring, it would also bring pain to AZO’s current investors.
Break Down on AutoZone Stock
Although AutoZone missed estimates, investors should focus on the balance sheet and avoid
AutoZone stock until management makes the balance sheet a priority.
