Advance Auto Revs Growth Engine

9/20/2010


  Recent Price
$57
  Dividend
$0.24
  Yield

0.4%

  P/E Ratio
17
  Shares (millions)
86
  Long-Term Debt as % of Capital
22%
  52-Week Price Range
$57.63 - $36.11

Shares of Advance Auto Parts ($57; AAP) have raced to a 42% gain this year, while the S&P 500 Index seems stuck in neutral. As its name implies, Advance Auto sells everything from alternators and water pumps to floor mats, antifreeze, and motor oil.

Same-store sales rose 6.9% in the 28 weeks ended July 17. In the same period, per-share profits soared 27% on 8% higher total revenue. Sales accelerated toward the end of the June quarter, as the summer heat drove demand for such higher-margin products as batteries and air-conditioning compressors. Buybacks trimmed the share count by 8% in the first half of 2010, boosting profits by $0.14 per share. In August, management announced a fresh $300 million stock-repurchase program, enough to eliminate about 6% of the company’s shares.

The consensus projects 2010 earnings of $3.80 per share, implying 27% growth on 8% higher sales, and estimates are on the rise. Advance Auto is a Focus List Buy and a Long-Term Buy.

Business breakdown

Advance Auto operates about 3,500 stores under various names in 39 states, Puerto Rico, and the Virgin Islands. The company’s extensive distribution system helps minimize inventory idling on store shelves. A typical store carries 16,000 distinct products, but Advance Auto’s network can deliver 87,000 additional products within one day. In-store kiosks let customers buy more than 340,000 products directly from vendors.

The complexity of modern cars makes them more difficult to repair, one reason why Advance Auto has begun supplying replacement parts to commercial mechanics. The commercial unit actually serves as an extension of the retail business; most of Advance Auto’s stores can shuttle merchandise to garages and dealerships. The commercial segment accounted for 34% of company revenue in the June quarter, up from 31% in the same period last year. Ultimately, Advance Auto sees the commercial business accounting for half of its revenue. Given that Advance Auto controls less than 5% of the highly fragmented commercial automotive aftermarket, the company has plenty of opportunities for growth.

Conclusion

Advance Auto has grown same-store sales for seven consecutive quarters. The company owes some gratitude to two broader trends.

Demand for repair services and parts increases when older vehicles remain on the roads. The average age of U.S. light vehicles has steadily climbed and now exceeds 10 years, up 21% from 1995.

A decline in dealerships increases the importance of independent garages and generic parts. Consolidation by U.S. automakers contributed to an 8% decrease in domestic dealerships last year.

At 17 times trailing earnings, the stock trades roughly in line with other automotive retailers in the S&P 1500 Index and slightly above its own five-year average P/E ratio, a decent price for a company that seems capable of delivering 10% to 13% annual profit growth over the next five years. 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

Jun '10 $1.16 vs. $0.83 + 7% $52.34 -

$41.76

17 - 13
Mar '10 1.19 vs. 1.02 + 9% 44.11 - 38.38 15 - 13
Dec '09 0.39 vs. 0.51 - 4% 41.77 - 36.11 14 - 12
Sep '09 0.69 vs.

0.59

+ 6% 47.41 - 38.08 16 - 13
           
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 $2.75 $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
95 82 58 84 79 98 89

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


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