AutoZone's Buy Call Confronts DeepValue's Cautious Stance on Valuation and Leverage

What happened

A Seeking Alpha article published on January 7, 2026, advocates buying AutoZone near 52-week lows, citing 8.2% revenue growth and store expansion while attributing recent EPS declines to temporary tariff-related LIFO charges. In contrast, the latest DeepValue master report maintains a 'WAIT' judgment, acknowledging AutoZone's high-quality franchise with over 40% ROIC but highlighting a 133% premium to DCF value and net debt/EBITDA of 2.85x. The report notes that Q1 FY26 saw gross margin compression of 200+ bps due to LIFO impacts, aligning with the article's margin pressure narrative but framing it within broader risks like SG&A deleverage and industry headwinds. Critical analysis reveals that the article's optimism may understate structural concerns, including leverage from debt-funded buybacks, negative equity, and threats from EVs and online competitors. Consequently, while the price correction offers a more attractive entry, the fundamental overvaluation and risk profile temper immediate bullishness.

Implication

The bullish case hinges on AutoZone's resilient demand drivers and temporary margin headwinds, but investors must critically assess whether the 25% correction adequately addresses the stock's overvaluation relative to intrinsic value. Leverage and negative equity amplify downside risks, especially if aggressive buybacks persist at elevated prices without corresponding cash flow growth. Monitoring margin stabilization is crucial, as sustained compression could signal structural issues amid industry pressures from EVs and digital competition. A pullback to levels closer to the DCF estimate of $1,418 per share would enhance the margin of safety, aligning with value principles. Therefore, adhering to a 'WAIT' stance allows for better risk-adjusted returns by avoiding overpayment and awaiting more favorable entry points.

Thesis delta

The new article does not shift the DeepValue thesis, as the report already incorporates recent data on margin pressure and growth, maintaining a cautious view due to overvaluation and leverage. It reinforces that while AutoZone's fundamentals remain strong, the current setup lacks sufficient margin of safety, and investors should prioritize valuation discipline over short-term sentiment.