Advance Auto Brakes For No One

5/7/2012


  Recent Price
$91
  Dividend
$0.24
  Yield
0.3%
  P/E Ratio
18
  Shares (millions)
74
  Long-Term Debt as % of Capital
33%
  52-Week Price Range
$93.08 - $49.50

Advance Auto Parts' ($91; AAP) operating results cruise in the express lane. Cost controls and share buybacks helped drive per-share-earnings up at a 27% annual rate over the last three years, while operating cash flow rose at a 20% clip.

The retail auto-parts industry is fragmented, with limited pricing pressure and only modest competition from the Internet. Advance Auto and several of its larger peers have managed impressive growth by scooping up weaker competitors and grabbing market share.

U.S. drivers traveled 1% fewer miles last year, in part because of rising fuel prices and high unemployment. But mileage rose more than 1.5% in both January and February of this year. The average age of U.S. vehicles climbed to a record 10.8 years in 2011, and older vehicles require more maintenance and repairs per mile driven.

Advance Auto operates more than 3,660 stores, selling to two markets: do-it-yourself (DIY) targets consumers who handle their own car repairs, while do-it-for-me (DIFM) focuses on professional mechanics at commercial garages. Advance Auto Parts is a Buy and a Long-Term Buy.

Signaling upside

Analysts are bullish on 2012, with the consensus profit estimate of $5.96 per share implying 17% growth and exceeding management's outlook of $5.55 to $5.75. Advance Auto's guidance leaves plenty of upside because it excludes stock buybacks, which lowered the share count by more than 12% in 2011 and nearly 11% in 2010. Management says it will continue an "opportunistic" repurchase strategy.

Starting with the midpoint of Advance Auto's guidance and assuming buybacks will lower the share count by 6% — half of last year's amount — implies 2012 earnings of $6.01 per share, $0.06 above the current consensus. A 10% share reduction would imply per-share profits of $6.28. Of course, the question is: How opportunistic does management feel after the stock's 56% gain since September?

March-quarter results, due May 17, should offer some insight. The consensus estimate, drifting higher over the past 30 days, calls for per-share earnings to jump 34% to $1.81 on 6% sales growth.

The Automotive Aftermarket Industry Association expects the parts industry's revenue to grow 3.5% annually through 2014, with DIFM growth likely to exceed 4%. Credit the commercial business's brighter outlook to increasingly complicated vehicles and a rising number of imported cars.

Advance Auto changed lanes about a dozen years ago, aggressively expanding into DIFM. The unit's sales grew 13% last year, representing 37% of total revenue, up from less than 27% in 2007. The commercial unit should continue to drive growth this year. Advance Auto expects total same-store sales will rise at low- to mid-single-digit rates in 2012, versus a 2.2% gain last year.

At 18 times trailing earnings, the shares trade 14% above their three-year average but in line with the median for automotive retailers. Shares trade at 15 times estimated 2012 earnings, a 4% discount to the median retailer. An annual report for Advance Auto Parts Inc. is available at 5008 Airport Road, Roanoke, VA 24012; (540) 362-4911; www.advanceautoparts.com.

ADVANCE AUTO PARTS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '11
0.90
vs.
0.57
+ 5%
71.69
-
55.61
15 - 12
Sep '11
1.41
vs.
1.03
+ 4%
63.59
-
49.50
14 - 11
Jun '11
1.46
vs.
1.16
+ 4%
72.32
-
56.58
18 - 14
Mar '11
1.35
vs.
1.19
+ 4%
67.00
-
60.09
17 - 15
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
6.17
5.11
0.24
72.32
-
49.50
14 - 10
2010
5.93
3.95
0.24
69.51
-
38.38
18 - 10
2009
5.41
3.00
0.24
47.41
-
29.50
16 - 10
2008
5.14
2.64
0.24
45.52
-
24.03
17 - 9
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
88
51
90
76
90
90

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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