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Advance Auto (AAP) Dips 20% YTD But Worth Holding for Long Term

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Shares of auto parts retailer Advance Auto Parts (AAP - Free Report) have plunged 20.5% on a year-to-date basis. As we know, the auto industry is struggling owing to the chip crunch and exacerbated supply chain snarls due to the Russia-Ukraine war and lockdown restrictions in China. Additionally, shares of AAP have also cratered amid a broader market sell-off owing to concerns over economic slowdown because of sky-high inflation and rising interest rates.

Besides these macro headwinds, Advance Auto is bearing the brunt of cost woes, which are hurting the stock. Escalating selling, general and administrative (SG&A) costs are limiting the firm’s margins. In 2021, its SG&A expenditure rose 10% year over year to $4.1 billion. In the last reported quarter, adjusted SG&A expenses increased to $1.30 billion, up from $1.2 billion in the year-ago period. The trend is expected to continue amid huge costs for store openings, partnerships and investments to strengthen the supply chain.For 2022, the firm expects capex within $300-$350 million, up from $290 million recorded in 2021. Rising investments to develop technology platforms and digital initiatives are also likely to dent cash flows. In the last reported quarter, AAP recorded a negative FCF of $169.8 million, deteriorating from a positive FCF of $259 million in the comparable year-ago period. In addition to operating expenses, commodity cost inflation, a difficult labor environment and global logistics challenges are likely to weigh on its near-term prospects. 

However, these are just temporary hiccups and shouldn’t prompt you to sell the stock. Advance Auto Parts looks well poised for the long haul on the back of several tailwinds. While the firm’s expansion and optimization of its footprint by opening new stores, widening its online presence and strategic collaborations may strain near-term financials, it augurs well for AAP’s growth. Encouragingly, Advance Auto estimates 2022 net sales in the band of $11.2-$11.5 billion, up from $10.99 billion recorded in 2021. Adjusted operating income margin is envisioned in the range of 10-10.2%, up from 9.6% in 2021. Adjusted EPS is now forecast between $13.30 and $13.85, up from the previously guided range of $13.20-$13.75 as well as $12.02 recorded in 2021.

The in-store pick-up advancements and enhancements to the firm’s online portal ”MyAdvance” have improved the customer shopping experience. The company has enhanced the front-end user experience of its online platform, which is leading to stronger traffic and higher conversion rates while in-store execution is resulting in notable gains in units per transaction.

We also appreciate the firm’s efforts to expand its lineup of differentiated billion-dollar brands, Carquest and DieHard.The acquisition of the DieHard brand from Transformco has boosted the company’s top line. Following the launch of DieHard in mid-2020, the brand crossed $1 billion in annual sales in 2021. AAP’s multi-year agreement with Bridgestone to sell DieHard batteries augurs well. To cash in on the soaring electric vehicle popularity, AAP recently announced the introduction of DieHard EV batteries, becoming the first auto parts retailer to sell 12-volt batteries specifically designed for green vehicles.Additionally, the company is focused on expanding its parts catalog for electric and hybrid vehicles.

The firm’s Warehouse Management Systems and Labor Management System initiatives remain on track and are set to unlock long-term margin expansion and drive productivity. Integration of Worldpac and Autopart International was completed by the end of first-quarter 2022 and is set to drive gross margin expansion.

Balance sheet strength and commitment to return shareholder capital are the other positives of AAP. The firm’s debt to capitalization stands at 24%, well below the industry’s 79%. The low leverage of the firm increases its financial flexibility to tap onto growth opportunities. The company’s times interest earned ratio of 19.83 is higher than the auto sector’s 12.55, which signals default risk. In 2021, AAP returned $1 billion through share repurchases and dividends. To investors delight, Advance Auto boosted its buyback program by $1 billion and also hiked its dividend by 50% in February.  In the first quarter of 2022, AAP returned over $400 million to shareholders via share repurchases ($248 million) and quarterly cash dividends ($154.8 million). 

In the light of these tailwinds, we think it is worth retaining Advance Auto in your portfolio. The firm’s expected long-term EPS growth rate is 12.74%. The company currently carries a Zacks Rank #3 (Hold).

Top-Ranked Auto Picks

Some better-ranked players in the auto space include AutoNation (AN - Free Report) and Penske Automotive (PAG - Free Report) . While AN flaunts a Zacks Rank #1 (Strong Buy), PAG carries a Zacks Rank #2 (Buy), currently. You can see the complete list of today’s Zacks #1 Rank  stocks here.

AutoNation is one of the world's largest automotive dealers.  Its first-quarter 2022 results marked the eighth consecutive quarter of record-high numbers. A diversified product mix, strong footprint, a large dealer network and aggressive store expansion efforts are set to fuel the firm's profitability. The acquisition of Peacock Automotive Group and Priority 1 have buoyed AutoNation’s portfolio. Enhanced digital solutions have helped AutoNation to further boost profitability and market presence.

The Zacks Consensus Estimate for AN’s 2022 earnings and sales implies year-over-year growth of 28% and 6.7%, respectively. It has surpassed earnings estimates in the last four quarters, with an average surprise of 27.4%. AutoNation has a long-term EPS growth rate of 24.7% and a VGM Score of A.

Penske is riding high on strategic acquisitions. It has become the largest dealership group for Freightliner in North America with Warner Truck Centers buyout. The buyouts of Kansas City Freightliner, McCoy and Team Trucks Centers are boosting Penske’s top line. Notably, over the last 12 months, the company has completed acquisitions or opened new dealerships that would add $1.9 billion in annualized revenues. Expansion of digital capabilities, balance sheet strength and investor-friendly moves are other positives.

The Zacks Consensus Estimate for PAG’s 2022 sales and earnings implies year-over-year growth of 10% and 10.7%, respectively. It surpassed earnings estimates in the last four quarters, with the average surprise being 17.7%. Penske currently has a VGM Score of B.


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