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Who Are AAP?

Advance Auto Parts is a leading automotive aftermarket parts provider that serves both professional installer and do-it-yourself customers. The company operates over 4,700 stores and 318 Worldpac branches in the United States, Canada, Puerto Rico, and the U.S. Virgin Islands. Advance also serves 1,315 independently owned Carquest branded stores across these locations in addition to Mexico and various Caribbean islands.

The Bull Case

1. Valuation

Make no mistake, AAP’s performance has been rough, but it’s likely that the stock price has been hit too hard, compared to the overall picture.

AAP is down 59% YOY. And as we’ll see in a moment, there is nothing in the company’s financials, strategy or wider news, that is reflective of such abysmal performance.

Do I think it likely that a correction is coming? Probably – as the stock has dropped just a little too much, amid slashed dividends, increased debt, and rising costs.

2. Industry Security

Cars aren’t going anywhere. This then is an industry that offers a certain margin of safety in any portfolio.

This is especially true when considering the move of retail (in general) to online. I don’t see this as an issue for automobile parts, as fittings and wider mechanics will always be required.

And yes, there will be a shift to EV. On the whole, it seems these vehicles need far less upkeep than their traditional counterparts, but at least AAP are attempting to meet demand. In 2019, AAP bought the company DieHard – a battery producer. – showing that AAP are ready to adapt. 

3. Steady Financials

Over the long term, AAP have maintained steady financials in many categories.

Revenue has consistently grown YOY; and it seems as though management are successful in capital allocation.

Dividends have also been fairly strong over the past few years – which offers a certain level of safety for potential investors.

What’s more, there has been significant insider buy transactions over the last 3 weeks. This indicates to me that those in he know have confidence in the company’s share price, and where it’s about to go.

The Bear Case

1. Poor Performance

As stated above, at the time of writing, AAP stock is down 59% YOY.

When looking at 5 years, the stock is down 50%.

And ten years? Not quite as bad – but still down 15%.

So what does the next ten years hold? For me, I can’t imagine a success story.

2. Financials

Where to begin.

While revenue has consistently grown YOY, for the past ten years, profits have grown at a far more lackluster pace.

In 2013, net income was $392m. In 2022, profits sat at only $501m.

Meanwhile, total debt has grown from $1.1b (2013) to $4.1b in 2022. That number is rising too. 

This at a time where the AAP’s cash and cash equivalents has decreased from $1.1b to $269m.

3. Analysts’ Predictions

You might think that, due to the abysmal stock performance, analysts are optimistic about future growth.

Sadly not.

Analysts predict an average annual earnings growth of 4.7%. That’s 7.5% less than the predicted industry average, which sits at 11.2%.

EPS is also expected to fall, at least in the short term. A fact that is hardly unsurprising given the company’s poultry financials.

Final Thoughts

Additional Notes

On June 13th, reports were released that AAP may be in the sights of an activist investor – which caused the share price to rise 4.4%.

At the end of May, AAP slashed their dividend by 83%.•The current CEO, Tom Greco, who has been with the company for just over 7 years, is set to retire a the end of 2023. It is difficult to know how this will impact the share price, until we know his successor.

Conclusion

To put it bluntly, I can’t find many reasons to invest in AAP.

Their financials, while showing slight signs of life, are flat and unresponsive. Net income isn’t growing fast enough over an extended period and I question whether the company can make any significant upgrades that will have a positive impact on the share price.

And while management seem to be doing an ok job – and confidence seems to be high by those in leadership roles – I think there are better investments out there. Even if AAP is trading at a discount right now.