Bain’s third largest holding was in a stock which it had not owned any of at the beginning of October: $14 billion market cap auto parts store AutoZone, Inc. (NYSE:AZO). Since Autozone sells replacement parts, it does not have much exposure to the overall economy as demonstrated by its beta of 0.2. The stability of its business is also keeping growth low- in its most recent quarter, revenue was up only 3% and net income up only 6% compared to the same period in the previous fiscal year. The trailing earnings multiple of 16 looks a bit high considering that recent financial performance, and even with analyst expectations of bottom-line growth for the next two years the forward P/E is 13. As long as growth remains as slow as it is, it is challenging to see Autozone has being that much undervalued.
Of course Apple isn’t exactly expensive itself- in fact it trades at a discount to either stock at 10 times trailing earnings- but concerns have developed over the company’s future with investors currently pricing in a decline in earnings. We think that Apple is still at least a candidate for value status, and think it offers better prospects on that front than Autozone. Express Scripts does look intriguing seeing as its current earnings run rate puts it in value territory with likely some remaining upside to come, and we would be interested in taking a closer look at that company.
Disclosure: I own no shares of any stocks mentioned in this article.