Advance Auto Avoids Pileup

10/3/2011


  Recent Price
$60
  Dividend
$0.24
  Yield
0.4%
  P/E Ratio
14
  Shares (millions)
77
  Long-Term Debt as % of Capital
43%
  52-Week Price Range
$72.32 - $49.50

Advance Auto Parts ($60; AAP) is benefiting from factors that might indicate tough sledding for other stocks, including modest sales of new cars and a general pessimism about the U.S. economy. In the June quarter, Advance Auto said cash flow from operations rose 25%, ending a three-quarter stretch of declines.

Since the end of May, Advance Auto's share price has dipped 3%, versus a 13% decline for the S&P 500 Index. While the stock's defensive attributes are a big part of its appeal, Advance Auto is also attractive based on its modest valuation and well-defined growth propects. Advance Auto Parts is a Long-Term Buy.

Business breakdown

The average age of cars on U.S. roads exceeds 10 years, up from 8.4 years in 1995. As vehicles get older, they require more parts to keep running. Many of Advance Auto's products are geared toward do-it-yourself (DIY) customers who replace radiators, starters, and water pumps themselves. Such ancillary products as floor mats, seat covers, and antifreeze also line the shelves of the roughly 3,600 Advance stores.

Same-store sales rose 1.9% in the 28 weeks ended July 16, on top of 6.9% growth in the same period in 2010. Advance Auto faces steep hurdles to extend its streak of 11 quarters of higher same-store sales, building on tough comparables with 9.9% growth in the September 2010 quarter and 8.9% in the December quarter.

About 90% of Advance Auto's stores offer commercial delivery programs that shuttle merchandise to garages and dealerships. Commercial sales account for roughly 35% of revenue, up from 25% three years ago. The investment in commercial has slowed store expansion, which has affected DIY growth. But the $40 billion commercial market is fragmented, and management seems intent on growing its 5% share. Advance Auto sees the commercial business ultimately accounting for 50% of sales.

Gross profit margin has widened in nine of the last 10 years. Advance credits structural changes, not cyclical factors, for the profitability gains. The company still sees opportunities to cut costs, especially in the supply chain. Advance is also increasing its focus on failure and maintenance parts, where it can more easily pass on higher costs to customers.

Management keeps little cash on the balance sheet, preferring to shrink the share count, down more than 10% from a year ago. In August, the company announced a fresh $300 million repurchase program, equaling more than 6% of outstanding shares.

Conclusion

Rising analyst estimates target 2011 earnings per share of $4.68, up 19%. In the September quarter, Wall Street calls for 14% higher per-share profits on 4% sales growth. Rival AutoZone's ($326; AZO) strong August quarter bodes well for Advance Auto.

At 14 times trailing earnings, shares trade 13% below their five-year average. Based on the 2011 profit consensus, the stock's P/E is 13, a 9% discount to the median automotive retailer in the S&P 1500 Index. An annual report for Advance Auto Parts Inc. is available at 5673 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 '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
Dec '10
0.57
vs.
0.39
+ 11%
69.51
-
57.22
18 - 15
Sep '10
1.03
vs.
0.69
+ 11%
60.21
-
49.76
17 - 15
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
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
2.75
0.24
45.52
-
24.03
17 - 9
2007
4.84
2.32
0.24
43.62
-
29.51
19 - 13
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
85
52
67
87
73
59
73

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


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