This week’s Hot Stock, AutoZone (AZO), a distributor and retailer of automotive replacement parts and accessories has long been a favorite stock of ours. We featured the company back in February 2014, and the stock price has increased over 27% since then. This large price increase rightfully begs the question of whether or not AutoZone is still a good investment. With another impressive quarter recently in the books along with quality management partaking in shareholder friendly activities, the answer remains a resounding yes. We feel 2015 could be another great year for AZO, which currently earns our Attractive rating.

The exceptional revenue and profit growth, along with the class-leading return on invested capital (ROIC) that we highlighted in our previous report have only gotten stronger. AutoZone has increased its after-tax profit (NOPAT) every single year since 1998, which includes 3% NOPAT growth in 2014. Similarly, AutoZone has maintained a ROIC at or above 20% since 2003 and had a top-quintile 24% ROIC in 2014. In its 2Q15 earnings report, AutoZone announced that it had grown revenue by 8% year over year, which allowed the company to grow NOPAT by 4% on a trailing twelve-month basis.

Despite AutoZone’s impressive history of NOPAT and ROIC growth, along with the great increase in stock price over the last year, AZO remains a great investment opportunity. At its current price of ~$688/share, AutoZone has a price to economic book value (PEBV) ratio of 1.2. This ratio implies the market expects AutoZone to only grow NOPAT by 20% from current levels over the rest of the company’s lifetime. While AutoZone won’t grow NOPAT by this much in one year, the company has not failed to grow profits in any of the past 16 years. Long-term investment in this company can be extremely profitable. If we give AutoZone credit for only 4% compounded annual NOPAT growth for the next seven years, the stock is worth $795/share today –– another 15% upside. Add in the continued share repurchase program that was expanded in March and it’s easy to see why AutoZone remains one of our top stocks.

Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.

Photo Credit: time anchor (Flickr)

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