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Bull of the Day: Advanced Auto Parts (AAP)

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Advanced Auto Parts (AAP - Free Report) is a Zacks #1 (Strong Buy) that operates in the automotive aftermarket industry, selling replacement parts. It’s one of the leading automotive parts providers and caters to the DIY customer.

The company recently had a blowout quarter, where it beat on both the top and bottom line. The stock gapped higher after EPS, but was sold back down to pre-earnings levels.

Investors now must decide if the momentum seen during the pandemic will continue and if the DIY trend can fuel more growth.

About the Company

Advanced Auto Parts has almost 5,000 stores and has 39,000 full time employees. It is headquartered in Raleigh, North Carolina and was founded in 1932.

The company has a market cap of about $10 Billion and has Zacks Style Scores of “A” in Momentum and “B” in Growth. The Forward PE is 18, which is an appropriate valuation, giving it a Zacks Style Score of “C” in Value.

The company pays a dividend of 0.67% and has a 1.35 beta, making it slightly more volatile than the market.

Q2 Earnings

APP reported on August 18th, seeing a topline beat and a positive EPS surprise of 48%. Same Store Sales came in at 7.5% v the 6.2% expected and operating margins were up 11.2% year over year.

While the company withdrew its FY20 outlook, they believe their focus on the digital platform will drive strong results in the back half of the year. The company also noted that they benefited from a surge in industry demand fueled by government stimulus.

The beat was the eighth beat over the last two years and marked the biggest upside surprise in that time frame.

Estimates

Over the last 60 days, estimates have shot higher. For the current quarter, we have seen estimates raised by 32%, from $1.97 to $2.60. For the current year, we have seen a 29% move higher in that same time frame. Most analysts are citing consumer DIY trends in tough economic times as a catalyst. However, a shift away from public transportation is also forcing some to adjust to used vehicles that need fixing up.

DIY Trend and Auto Zone earnings

Economic uncertainties motivate people to save money and people have become more inclined to buy used over new vehicles.  Advanced Auto parts, O’Reilly and AutoZone have all seen the DIY trend accelerate because of the pandemic.

AutoZone just reported earnings this week and confirmed that the trend is continuing. The company reported a 25% EPS beat and saw domestic SSS up 21.8%.

The Technicals

After spiking to 2020 highs, the stock turned lower with the recent market pullback and dipped below the 50-day MA. The stock could see support at the 61.8% retracement level at $147(drawn from July lows to post-earnings highs). However, if market pressure continues, we could see the stock test the 200-day at $137.25.

Looking to the upside, over $155 would be a bullish signal. Look for 2019 highs around $183 as the next resistance area.

Bottom Line

The DIY trend is continuing due to tough economic times and the pandemic. With another round of economic stimulus likely before the year is over, the auto parts growth story looks solid. With the recent market pull back, investors should look at technical support for entry levels in Advance Auto Parts.  

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