Prepared by Stephanie, analyst at BAD BEAT Investing

AutoZone (AZO) recently reported earnings, and we think on the big market pullback this week, you should be looking to buy AZO below $1,100 again. At that level, we want to reiterate that it will be time to reenter the stock. With the COVID-19 market crisis, AutoZone’s operations have been impacted, but the company has held up very well all things considered. It remains our opinion that this company will thrive moving forward, but the stock also is a little ahead of itself.

There are concerns that COVID-19 is resurging, but major shutdowns are unlikely, at least to the extent we saw in the spring. That remains to be seen, but we see it as likely that many will try and extend the life of their cars. Under these assumptions, AutoZone as a company should reap rewards, so we think as the stock pulls back again, it should be considered. We think the future is bright, and that while the near term is questionable, the longer-term picture looks solid. Let us discuss.

Q4 highlights

In Q4, AutoZone registered sales of $4.55 billion, which was just a 14% year-over-year increase, and was a decent beat versus consensus analyst estimates of $400 million, and well above our expectations for $4.25 billion. As sales continue to be strong, we need to, of course, understand what’s driving these sales. The critical metric you should care about is comparable sales, which have been on the mend since bottoming out in 2017. Comparable store sales were up 21%

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We are looking to see if AutoZone is able to continue to focus on increasing sales while controlling expenses, particularly those impacting gross margins. We expect margins to remain strong and not fluctuate greatly, and in the heart of the COVID-19 crisis, the company delivered gross margins that were flat from a year ago.

Profit margin was 53.1%, which is strong on its own but dipped from a year ago. So, we saw big sales growth, decent sales margins, and the operating margin remains solid. Keep in mind that the great buyback program is now on pause, but when that resumes, it will provide a nice floor of buying under the stock.

Net income for the quarter increased $175.2 million, or 31.0% over last year’s quarter, to $740.5 million, while EPS increased 36.9% to $30.93 per share from $22.59, surpassing our expectations by $5.00 per share. We see the push for autoparts and keeping older cars on the road to pick-up.

Strength in 2021

We reiterate our bullish stance on our expectations for comparable sales. We are projecting for the entire year 2021 comparable sales of 8-15%. AutoZone also continues to strategically open new shops to fuel future growth. With new store openings, and those opened in the last three quarters, sales should see continued low-single digit growth in sales.

On the market weakness, you should be buying AutoZone under $1,100. It is a great buying level because we see EPS for fiscal 2021 growing.

The valuation is becoming attractive. If sales grow in the low double digits on the back of strong comps, excluding any future buybacks, we anticipate fiscal 2021 EPS of $75-81. That is huge and means the stock is attractive here.

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Usually, AZO stock can be bought for 18x-19x forward EPS. At the low end of our estimates, and shares at $1,125 now, we are at 15x forward EPS. If you can get shares under $1,100, you are looking at getting shares below 15x forward EPS. Buy the dip.

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Disclosure: I am/we are long AZO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.