A turnaround for this auto parts retailer is in the works and Wall Street is paying attention. Recently, the company’s stock has been upgraded by Raymond James to ‘Strong Buy’ and by Susquehanna to ‘Positive’.
Advance Auto Parts Inc (AAP)
From Argus Weekly Staff Report
We are reaffirming our BUY rating on Advance Auto Parts Inc. (AAP). We believe that under the watchful eye of the new AAP Chairman, noted activist investor Jeffrey C. Smith, the CEO of Starboard Value, AAP’s new CEO Tom Greco will apply his expertise from a 30-year career at PepsiCo to make AAP a more efficient and customer-focused company.
The company has faced negative headwinds, which are related mainly to the General Parts integration. In his first call with investors, Mr. Greco said, ‘We’ve been outflanked on supply chain, outperformed on corporate activity metrics and out-executed on customer service. Mr. Greco believes, and we agree, that the company has the ability to fix its operating problems, raise margins and generate significant shareholder value.
We do not expect this turnaround to happen overnight, but we expect to see a succession of small victories over the next year, with a strong focus on product availability and in-stock levels.
On November 14, Advance Auto reported 3Q16 adjusted, non-GAAP net income of $129 million or $1.73 per diluted share. Third-quarter adjusted earnings exceeded consensus forecast of $1.71 per share, according to StreetAccount.
Total sales declined 2%, to $2.25 billion. The result was better than our estimate of $2.18 billion and the StreetAccount consensus of $2.2 billion. That sales decline reflected a 1% drop in comparable-store sales. This was a nice sequential improvement from a 4.1% comp decrease in 2Q.
AAP is trading at 22-times our 2016 earnings estimate and 20-times our 2017 estimate, compared to a five-year historical range of 12-24. The shares are trading at approximately 16.5-times trailing EBIT. We believe this multiple is intuitively elevated as the company works on its integration and strives to improve profitability, but we see considerable upside.
We expect further share price appreciation over the long term, driven by improving positive comp-store growth, underlying gross and operating margin expansion, and SG&A leverage. We believe that the board presence of an expert investor in Starboard will keep management keenly focused on improving operations.
We are maintaining our one-year target at $185. We continue to see upside for the shares. We are very confident that Mr. Greco is the right executive for the job and that he will deliver operating improvements that will be a catalyst for the shares.
Jim Kelleher, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425-7500, November 25, 2016