Mario Canales & Ly Dang
Financial Cases & Problems
Dr. Alicia Rodriguez-Rubio
Throughout the existence of an international corporation such as AutoZone, they have gone through a series of modifications that have permitted sustainability and stable performance during many years. Over the past five years, AutoZone’s stock price has seen a relatively steady increase. There have been some drops in the stock price during that period, but, for the most part, the stock price has been on the rise. The number of share repurchased by AutoZone during that period of time has also been consistent with the stock price as it has increased steadily. The ROIC has also mainly increased over the past five years. Moreover, AutoZone has been able to steadily increase its earnings per share. However, stock purchases; reduce the supply of stock in the market, boosting the price. Many shareholders expect this activity to continue, expecting that AZO will continue to use available cash on hand from operations to finance more stock repurchases, although it will eventually be unbearable. AZO is increasing its fixed borrowing costs, increasing its leverage and dependence on the debt markets, and decreasing its fiscal viability. Starting in 1998, AutoZone had returned capital to shareholders through share repurchases. AutoZone’s consistent repurchases reduced the number of shares outstanding by 39 percent from 2007 to 2011. The repurchases had been funded by operating cash flows and debt issuances. A share repurchase also had the effect of reducing a company’s equity on the balance sheet. Since AutoZone had been increasing its debt outstanding as it was decreasing the equity outstanding, its invested capital had remained fairly constant since 2007, which, when combined with rising earnings, resulted in strong measures of ROIC. A share repurchase is a company buying back its own stocks from the market. It is basically a company using its cash to buy its own shares and invest in itself. By repurchasing its own shares a company is able to enhance its earnings per share by reducing the number of shares outstanding and also reduce the book value of shareholder’s equity. In AutoZone’s case, the repurchases resulted in the invested capital staying fairly constant. Combining that with the increased earnings from operating cash flows, and the ROIC was able to see an increase over that period. The share repurchase program used by AutoZone also caused the steady increase in earnings per share for the company. As mentioned above, companies who perform this tactic should carefully measure financials and do a cost-benefit analysis in order to continue performing steadily towards the market. A large portion of the stock price performance is definitely attributed to the share repurchase program that AutoZone has been using throughout a period of time. Throughshare repurchase, AutoZone has been able to steadily increase its earnings per share. This has resulted in positive reactions from the market and an increase in stock prices. The case study presets the trends in stock price that AutoZone has had, such as 2004 when AutoZone implemented its practice of buying back large amounts of its shares. Exhibit 1 demonstrates that the stock price activated an increase of price consequent of the actions. Therefore, through these facts we can attribute the strategic actions enabled by AutoZone contributed towards having a steady stock price performance. Assuming that in 2011AutoZone had 40,109 shares outstanding and a net income of $848,974. The current stock price was $301.30 (August 27th, 2011). If they use 5% of stock repurchase. Therefore: Autozone's current EPS = $848,974 / 40,109 = $ 21.17 per share P/E ratio = $301.30 / $21.17 = 14.23x, with a 5% stock repurchase, the following would be true: AutoZone’s shares outstanding are reduced to 38,104 shares (40,109 x (1-.05)) AutoZone’s EPS = $848,974 / 38,104 = $22.28....
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