September 30, 2015

Advance Auto Parts Is Well-Positioned For Growth –

SummaryThe growing market prospects are allowing Advance to provide double digit revenue growth.

The acquisition of General Parts makes Advance the biggest automotive supplier in America.

Predicated on the fundamentals, the company is undervalued.

The automotive parts sector has recently been gaining ground, owing to the ageing vehicles which are demanding more repair work. In the automotive parts sector, there are just two forms of companies: one that embraced the dual-marketplace approach early, under which products are sold to both the do-it-yourself “DIY” customers and professional clients; as well as the other that sells to just one of these. Though Advance Auto Parts Inc. NYSE:AAP didn’t embrace the dual-marketplace approach at the beginning, converging to it later has enabled the firm to improve its competitive position significantly.

In this column, I’ll appraise Advance’s fiscal strength by looking at its recent quarterly performance. QuarterIn the recent interval, Advance was able to grow its revenue by 51% to $2.35 billion. Though the competitive store expansion contributed to the increase, positive comparable-store sales growth rate of 2.6% indicated that the company is extracting more revenue per store.

The gross margin, however, decreased by 5.1% to 45.2% as unfavorable product mix led the firm to sell lower-margin products to its commercial customers.

Selling, general and administrative expenses also benefited due to this acquisition as they dropped by 360 bps as a percent of income. In summary, Advance enjoyed higher revenue coming to it as a result of marketplace growth. This marketplace growth is likely to persist later on.

The reason behind that is that the cars are getting older. The common age for passenger cars and light trucks combined now stands at 11.3 years. The age has grown by 14% since 2007 and is forecast to increase further in 2015. Furthermore, figures have shown that consumers are keeping their vehicles with them for a longer amount of time. The interval has prolonged by 22 months over the past ten years to a mean of 60.9 months. Both these variables imply there is a greater need of vehicle care to keep the old fleet in a good shape. In addition, it clarifies why the firm is experiencing double digit growth in its top line.

In the current macro environment, it is sensible to acquire businesses and expand coverage. Advance’s acquisition of General Parts this year has made the firm the biggest advanced auto coupon code parts supplier in America. Additionally , the acquisition is materially beneficial for Advance as it adds annual revenue of $3 billion to the company’s income statement. Besides, the optimal price structure of General Parts can help Advance in lowering its overhead costs. A few of these synergies were already visible in the recent quarter.

The major benefit of the acquisition is it enlarges Advance’s regional coverage. The increase in the quantity of stores will ensure greater availability of auto parts to customers and, in turn, will result in higher sales later on.

Featuring these prospects, Advance has raised its 2014 earnings per share guidance to the number of $7.3-$7.5 from the earlier guidance of $7.2-$7.4. Yahoo FinanceLooking completely through the fundamentals, Advance trades at a PE ratio of 21.7 compared to the sector’s 46.5. This indicates that the company is considerably undervalued. The above table summarizes the company’s valuation supplied by 19 brokerages. The mean target price estimate of $147.89 provides an upside potential of 13% at the current market price. The high target, which is the most optimistic estimate, creates an upside of 37% at the current market price. I believe that this potential is achievable, given the market prospects of Advance along with the acquisition of General Parts.ConclusionThe company continues to be maintaining a stable dividend flow for some time. But the dividend payment of 6 cents per share is just not what the investors should focus on. It’s the price gains which make Advance an attractive investment to consider. The organization has given a price increment of 60% in per year. Considering the larger store base, price synergy originating on account of the acquisition, along with the enhancing market circumstances, the organization should continue delivering strong capital gains ahead. Therefore, it holds a buy rating.