AutoZone's Pullback Spurs Bullish Calls Amid Persistent Overvaluation Concerns

What happened

A recent Seeking Alpha article advocates buying AutoZone shares after a price pullback, citing attractive valuation and growth from international expansion. The article highlights an 11.55% YoY increase in free cash flow in Q1 FY26 and a strategic shift towards growth investments over buybacks. However, the DeepValue master report indicates that AutoZone is significantly overvalued, trading at ~22x P/E and 133% above DCF intrinsic value. The report notes near-term margin pressures from LIFO and SG&A deleverage, coupled with high leverage (net debt/EBITDA ~2.85x) and industry headwinds like EV adoption. Despite the bullish sentiment, the current setup lacks margin of safety, reinforcing a wait-and-see approach for investors.

Implication

The pullback may seem appealing, but shares remain expensive relative to fundamentals, limiting upside potential. Improved free cash flow is positive, but margin compression and high leverage could strain future performance and amplify downside in a downturn. International expansion offers long-term potential, but near-term headwinds from EVs and online competition persist, threatening market share. Management's shift to growth investments is a strategic move, but it may not immediately improve profitability or reduce valuation gaps. Therefore, a prudent strategy is to monitor for better entry points or evidence of sustained margin improvement and debt reduction before committing capital.

Thesis delta

The new article emphasizes growth opportunities from a pullback, but it does not alter the core thesis from the DeepValue report. AutoZone remains a high-quality franchise with overvaluation and leverage concerns, requiring investors to wait for a more compelling risk-reward profile. No significant shift in the investment thesis is warranted based on this news alone.