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Here's Why You Should Retain Advance Auto Parts Stock for Now

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Advance Auto Parts, Inc. AAP is undertaking several initiatives in a bid to strengthen and streamline the supply chain. However, rising costs and price competition among industry peers are concerning. The company’s shares have gained 0.2% over the last three months, underperforming its industry’s 9.6% rise.

Let’s delve deeper to find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.

What’s Aiding the Stock?

Strong Portfolio Expansion: Advance Auto continues to expand and optimise its footprint by opening newer stores, widening online presence and through strategic collaborations. Last year, Advance Auto announced a partnership with Midwest Auto Care to provide automotive parts and training support to its member facilities. In addition to driving growth across professional business, the firm continues to make progress on its “Do-It-Yourself” (DIY) omnichannel e-commerce platform.

Supply-Chain Initiatives: The company has also been undertaking measures to strengthen and streamline its supply chain, in order to meet customers’ evolving needs. The cross-banner-replenishment initiative will likely complete by mid-2021, and deliver significant cost savings and product availability. Itis also looking into store transformation and inventory positioning. Further, the company is laser-focused on improving its retail traffic to fuel growth. These initiatives are likely to help the company unlock its long-term margin expansion.

Speed Perks 2.0 Progresses Well: Advance Auto’s loyalty-incentive programs bode well for its growth prospects. In third-quarter 2019, the firm rolled out a Speed Perks 2.0 program that includes technology enhancements and provides employees with data insights. It is an important platform to help Advance Auto enhance its DIY business. This program led to 45% growth in the number of Speed Perks transactions, along with new member sign-ups surging around 80%.

Strengthening Balance Sheet: The company’s strong balance sheet and investor-friendly moves are also major positives. The firm’s low leverage of 44.27% provides adequate financial flexibility to tap its growth opportunities. Further, the company’s solid buyback program boosts investors’ confidence. In the third quarter, the company authorized $700 million as an addition to the existing share-repurchase program.

However, there are a few factors dampening the company’s growth prospects.

Tough Competitive Landscape: Price competition is a concern for Advance Auto, as it competes with national and regional automotive retailers, such as AutoZone (AZO - Free Report) , O’Reilly Automotive ORLY, Pep Boys and CSK Auto Corporation.

Preferential Changes: The improvement in the quality of new vehicles has been resulting in reduced need for maintenance and repair of parts. This, in turn, impacts demand adversely in the automotive maintenance market. In addition, consumers increasingly opting for new vehicle purchases over maintenance of the old ones will affect the demand for Advance Auto’s products.

Rising Costs: With the auto-parts makers already grappling with high costs of steel and aluminum, rising tariffs in China will likely intensify the situation. Escalating costs will dent margins if the company is unable to pass the price increases to customers. Moreover, the company has huge capital expenditure. Funding of its plans — including acquisition, store openings and investments to develop the supply chain — are flaring up expenses.

Which Way are the Estimates Treading?

For the current quarter, the Zacks Consensus Estimate for earnings is pegged at $1.37, calling for a 17.09% increase from the prior-year reported number. The same for revenues is pinned at $2.12 billion, indicating an increase of 0.93%, year on year.

Key Pick

Investors can consider a better-ranked player in the same industry, SPX Corporation SPXC, carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SPX has an estimated earnings growth rate of 8.09% for 2020. The company’s shares have surged 93.8% in a year’s time.

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