Event: AZO reports its fiscal Q4 earnings on September 25th before the close. The options market is implying about a 2.75% one day move, which is in line with the 4 qtr avg of about 2.75%, but slightly above the 8 qtr avg of about 2%.
Sentiment: Wall Street analysts are generally positive on the stock, with 13 Buys, 7 Holds and 1 Sell, with an average 12 month price target of around $451. Short interest is around 6% of float which is unchanged over the past 6 months.
Options Open Interest: Open interest is evenly split between calls and puts. The bulk of the open interest is in Sept and Jan14, with the 440 strike calls having a large amount of open interest in both expiries. The all-time high (and high of the year) for AZO is 452.185 on July 31st of this year.
Price Action / Technicals: AZO’s long-term, consistent uptrend was interrupted in mid-2012. Though the stock made a higher high above the 400 level in 2013, the stock has been much choppier than it was during 2010 and 2011’s incredible run:
The $400 level is crucial long-term support and has held throughout 2013. In the short run, the 50 day moving average around $429, and then the downside gap at $445 are the two levels to watch.
Fundamentals: AZO’s chart shows an incredible run for the stock. But the stock’s strength has in fact been accompanied by earnings growth as well. AZO is expected to earn about $29.00 in calendar year 2013, vs. the 12.55 it earned in 2009. Its trailing 12 month P/E is actually flat over the last couple years:
As I’ve mentioned before, AZO has bought back a large amount of stock since 2009. The company has taken on increased debt, essentially becoming a more levered company. Here is debt/assets over the last 10 years for AZO:
That leverage amplifies the good times, as is evident from the stock’s rise. And so far, business trends continue to remain favorable. The stock also has greater risk of downside, though, because of that increased leverage.
So what of the outlook for the business? The company has been cautious about the consumer outlook. From its most recent release:
Over the past several years, various factors have occurred within the economy that affect both our consumer and our industry, including the impact of the recession, continued high unemployment and other challenging economic conditions. Although we have seen a recent increase in new vehicle sales, we believe our consumers’ cash flows continue to decrease due to the previously listed factors. Given the nature of these macroeconomic factors, we cannot predict whether or for how long these trends will continue, nor can we predict to what degree these trends will impact us in the future.
However, this is partly management hedging itself. In reality, earnings results have been remarkably consistent in the past few years. At 16x, with 10-15% earnings growth, the stock is reasonably valued IF that consistency continues.
Volatility: 30 day implied volatility is starting to creep up ahead of next week’s earnings event, though realized volatility remains quite low:
AZO shares have rarely shown much volatility, even on the earnings event. The $400 to $445 range could be interesting to target.
Trades: AZO is at an interesting spot as a stock. I also view this earnings release as more important than normal given that it encapsulated the crucial summer selling season. Stay tuned for any potential trades early next week.