AZO reports earnings on Tuesday morning, March 4th, before the market open. This stock has fascinated me for the past couple years because of the steadiness of its uptrend. The monthly chart continues to amaze:
This incredible consistency has coincided with exceptional earnings growth for Autozone. I discussed the stock’s earnings and leverage in an earnings preview in September:
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:
AZO trailing 12 month P/E, Courtesy of Bloomberg
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:
Total Debt to Total Assets for AZO, Courtesy of Bloomberg
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.
Autozone’s earnings consistency has been amply rewarded given the increased leverage of the business. The stock was almost 10% in February (though off its best level from mid-Feb, around $560), to another new all-time high.
Since the stock ascent on the monthly chart is starting to look parabolic, I wanted to see whether a long volatility structure on AZO might make sense. At all-time highs, the stock might continue higher given the euphoric psychology, but it could also incur a nasty correction considering the nature of the stock’s move higher. Implied volatility (blue below) is in line with where it has been prior to earnings over the past year, while realized volatility (white) is significantly higher than it has been over the past year:[caption id="attachment_36976" align="alignnone" width="600"] AZO 30 day implied volatility (blue) vs. 30 day realized volatility (white), Courtesy of Bloomberg[/caption]
Rather than purchase premium ahead of the earnings event (since the vol is going to move lower after the event), I want to keep the AZO volatility on my radar for a potential long volatility position if implied volatility moves back down to the high teens after earnings. The increased realized volatility, parabolic move on the chart, and the high fundamental leverage indicate potential for high volatility in AZO over the next few months.