Why Advance Auto Parts, Inc
Why Advance Auto Parts, Inc. is a Turnaround Stock to Buy Today
By Lee Samaha Published June 04, two thousand sixteen Markets
Auto parts retailer has serially disappointed investors in the last year, while peers such as and have powered ahead in terms of operational spectacle and stock price.
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Advance Auto parts is having difficulty integrating an acquisition that was supposed to convert the company’s fortunes. Meantime, senior management have left and company guidance has been slashed for 2016. Is it madness to consider buying the stock? I don’t think so, and here’s why.
I see three reasons to be positive on the stock:
- End markets remain favorable, and the industry remains relatively recession-proof.
- Valuation versus peers remains very attractive, provided Advance Auto can improve operational spectacle to something like its peers.
- Turnarounds and retail integrations take time, but fresh management is very experienced and may have sandbagged expectations.
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The auto parts market distinguished itself in the last recession by producing same-store sales growth via. The reason is plain: When times are hard, consumers are reluctant to purchase fresh cars, and older cars mean more request for replacement parts. Not only is the industry relatively recession-proof, it’s also experiencing favorable secular trends as well. For example, the average age of the U.S. automobile has continued to rise despite the post-recession recovery in auto sales.
Data source: U.S. Department of Transportation.
Moreover, as you can see below, albeit Advance Auto Parts’ same-store sales growth has lagged its peers — largely because of its difficulties integrating Carquest — its peers are still reporting good growth — an indication that the market remains favorable.
Data source: Company presentations.
Also, consider that Advance Auto Parts has, in common with O’Reilly Automotive, a well balanced mix of faster-growing but lower-margin Do It For Me (DIFM) sales and Do It Yourself (DIY) sales — AutoZone sees around 80% of its sales from the DIY market.
What’s more, the stock is relatively cheap compared to its peer group.
In addition, the company has an chance to play catch-up to its peers in terms of generating free cash flow from its assets and operating margin. Incidentally, note the kink in O’Reilly’s metrics in two thousand eight as it dealt with integrating the CSK acquisition; in a similar way, Advance Auto Parts’s metrics dipped following the two thousand thirteen acquisition of General Parts International (holder of Carquest and Worldpac).
The stock is cheap, at present, for a reason. The integration has proven a lot tougher than expected (see the same-store sales chart above), and following a disappointing first-quarter results presentation, management announced it was no longer targeting $500 million in free cash flow and adjusted operating income margin of 12% for 2016.
More detail on the integration difficultiescan be found here. Advance Auto Parts is undergoing an ongoing process of consolidation (Carquest stores are merging with existing Advance Auto stores) and conversions (Carquest stores turning into Advance Auto stores), and the near-term negative effects are hitting same-store sales growth.
Indeed, on the first-quarter earnings call, freshly appointed CEO Tom Greco was candid on the issues: ” We proceed to practice shortfalls on execution, driven by availability and service levels.” Clearly, he has much work to do, but there are three reasons to believe current management can turn things around.
Very first, a fresh management usually means a fresh treatment. Greco’s appointment in April goes after the departure of Darren Jackson in January. In addition, activist investor and CEO of Starboard Value Jeffrey Smith is now the Advance Auto Parts Chairman, and the current CFO has agreed to leave the company.
Smith is well known for his deep-value investing activism, and Greco’s thirty years at (as CEO of Frito-Lay North America) stand him in good stead. Pepsico’s “Power of One” strategy (whereby snacks and beverage are marketed and promoted together) requires extensive awareness of inventory management, logistics & distribution, and an integrated treatment to in-store selling — all qualities that will serve Greco well as he comes to grips with Advance Auto Parts’s dual-store (DIY & DIFM) strategy.
2nd, given that Greco as been on the job for little more than a month, it would not be surprising if he has low-balled expectations in predicting full-year same-store sales guidance of negative 3% to negative 5%.
Third, as discussed previously,the practice of O’Reilly Automotive shifting to a dual-store model is a good marker for what Advance Auto Parts can achieve.
All told, the investment proposition is an attractive one, provided the fresh management can turn things around. On a risk/prize basis, I think the stock is a good value for investors looking for a deep value stock whose prospects are favored by attractive end market growth. Now the fresh management needs to execute, because if it does, the stock could soar.
Lee Samaha has no position in any stocks mentioned. The Motley Loser wields shares of and recommends PepsiCo. The Motley Loser possesses shares of O’Reilly Automotive. Attempt any of our Foolish newsletter services free for thirty days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Loser has a disclosure policy.
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