History suggests this unstoppable S&P 500 multibagger stock is perfect to buy and hold forever

With more than 6,400 stores in the United States, nearly 800 locations in Mexico and 127 stores in Brazil, AutoZone (AZO -0.06%) is a leading retailer of auto parts and accessories in America.

Over the past 20 years, AutoZone has delivered total returns of about 4,000%, making it a 41-bagger in a relatively short period — for true long-term investors, at least. These results are particularly incredible because they occurred despite the fact that the company’s sales tripled over these two decades.

Led by masterful capital allocators, AutoZone has provided investors with market-crushing returns — and looks poised to continue doing so. Here’s what sets AutoZone apart from the crowd.

Market-beating AutoZone indicators

AutoZone currently has three specific market-beating indicators working in its favor that I believe will continue to push the stock price to new highs.

1. A top return on invested capital

First, the company has maintained an average return on invested capital (ROIC) of 53% over the past decade. Measuring the company’s profitability relative to debt and equity, this high score shows that it is adept at generating new net income as it expands its geographic footprint in the Americas.

How vital is this high ROIC advantage to investors? Between 2004 and 2019, the top 40% of stocks with the highest ROIC in the Motley Fool’s investable universe gained 739% in value versus 423% for the universe as a whole. With AutoZone historically ranking in the top 20% of S&P 500 stocks for ROIC, the auto parts retailer has a long track record of expanding profitability, giving it a wide reinvestment moat.

2. A wide reinvestment moat

For a company to have a “reinvestment moat,” it must possess not only one or more of the traditional competitive advantages, but also the persistent ability to reinvest its profits in equally profitable opportunities. The result is compound growth as yesterday’s profits produce more profits down the road. AutoZone has a high ROIC, but what makes it a great investment today is that it still has a long growth path ahead of it, even though it’s already a top retailer in its niche.

The AutoZone network represents 16% of auto parts stores in the US, giving it unmatched power. With smaller regional and local retailers still operating about half of the nation’s auto parts stores, AutoZone is well positioned to take advantage of consolidation opportunities.

Given this potential consolidation and remaining unbroken U.S. land opportunities, management believes the company can add another 4,000 stores domestically. It plans to open about 300 new US stores and 200 new international stores annually by 2028 — a dramatic increase from the 190 store openings it has averaged annually since 2019.

Image source: Getty Images.

3. consistent share buybacks

While AutoZone is a compelling stock to own because of this reinvestment moat, its never-ending willingness to buy back shares with any remaining free cash flow sets it apart from the crowd. Since 2004, the company has reduced its total shares outstanding by 79%.

The combined power of a consistent, decades-long stock buyback program like AutoZone can provide enormous returns to investors who buy and hold for the very long term. For example, while the company’s net income has quadrupled over the past two decades, its earnings per share are more than 20 times higher due to its dramatically reduced share count.

AZO Net Income and EPS (TTM) data of YCharts

Companies with a strong track record of buying back their stock tend to win investments, according to a recent study from S&P Global showed. As a group, the top 100 stocks with the most redemptions in the S&P 500 from 2000 to 2020 outperformed the broader index by 5.5 percentage points annually.

A reasonable valuation for AutoZone

Despite the fact that AutoZone has delivered total returns of more than seven times the S&P 500 since 2004, its forward price-to-earnings (P/E) ratio of 21 remains well below the index average of 29. Not only is it reasonably priced that investors have to pay for the stock is a fair price for the company to pay, so we can expect share buybacks to continue.

Longer term, investors will want to monitor the ongoing shift to electric vehicles (EVs) and ensure that Autozone uses its distribution power to capitalize on this transformation. Ending the year with 210 “hubs” and 98 mega hubs — stocking twice and four times as many SKUs, respectively, AutoZone is well positioned to grow its SKUs as required for EV parts and increasingly. technology dense machines.

Ultimately, between its high ROIC, its ability to continue to use capital for growth opportunities domestically and internationally, and its impressive history of share buybacks, AutoZone looks poised to continue delivering multibagger returns for years to come.