Advance Auto Parts Picking Up Speed

3/29/2010


  Recent Price
$44
  Dividend
$0.24
  Yield

0.5%

  P/E Ratio
15
  Shares (millions)
94
  Long-Term Debt as % of Capital
14%
  52-Week Price Range
$47.41 - $36.11

The Forecasts does not recommend any automakers for purchase, and we are not optimistic about the industry’s prospects. So why do we like RIG ($44; AAP)?

Because parts retailers like Advance Auto are not bound by the limitations of the new-car market. Weak demand suggests consumers are holding onto their cars longer. And older cars need more frequent repairs.

In 2009, Advance Auto delivered sales growth of 5% and 14% higher per-share profits. While December-quarter profits and 2010 guidance fell short of expectations, the consensus projects per-share-profit growth of 9% this year and 12% next year.

Over the next two years, Advance Auto expects substantial improvement in profit margins, helped by a streamlined supply chain and more efficient scheduling that should lower labor costs. The possibility of higher margins, as well as share buybacks, offers some upside to per-share-profit targets. Advance Auto is a Long-Term Buy.

Two major markets

Advance Auto sells automobile parts and accessories through more than 3,400 stores in 39 states, Puerto Rico, and the Virgin Islands. The company targets two end markets: do-it-yourselfers and commercial customers (garage mechanics). Weakness in the do-it-yourself market has weighed on results in recent quarters, with same-store sales falling 0.8% in the December quarter. The commercial unit delivered same-store-sales growth of 9.5% for the quarter and 13.7% for the year. In coming quarters, the commercial market should deliver most of Advance Auto’s growth.

Sales to professional installers account for about 30% of revenue, and the company hopes to eventually grow the commercial business to 50% of revenue. Spending on capital investment and share repurchases has been limited in recent quarters, with the company instead deploying cash to improve the balance sheet.

Advance Auto built out its distribution network and boosted its commercial sales force by more than 50% last year, and spending on expansion and buybacks should increase as the economy improves. Management believes the market can support another 1,500 stores.

Growth, strength, and value

Despite the recession, cash flow is on the rise. In 2009, operating cash flow rose 46% and free cash flow jumped 79%. Advance Auto used much of that cash flow to beef up its balance sheet. The company now holds $100 million in cash, versus $204 million in total debt. A year earlier, Advance Auto had $37 million in cash and $456 million in debt.

Despite its solid growth and financial position, Advance Auto trades at a discount to its peers — and to its own history. At 15 times trailing earnings, the shares trade 11% below their five-year average P/E ratio. The stock also represents a value based on five-year norms for price/sales, price/cash flow, and price/book ratios.

Advance Auto also looks cheap relative to the average trailing P/E ratios of 20 for specialty retailers and 21 for automotive retailers. An annual report for Advance Auto Parts Inc. can be obtained at 5008 Airport Road NW, 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 '09 $0.39 vs. $0.41 - 4% $41.77 -

$36.11

14 - 12
Sep '09 0.69 vs. 0.59 + 6% 47.41 - 38.08 16 - 13
Jun '09 0.89 vs. 0.79 + 7% 45.45 - 38.11 16 - 14
Mar '09 1.02 vs.

0.86

+ 10% 42.39 - 29.50 16 - 11
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

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
2007 $4.84 $2.32 $0.24 43.62
-
29.51 19 - 13
2006 $4.62 $2.16 $0.18 45.50
-
27.65 21 - 13
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
83 58 88 83 86 19 30

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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