Advance Auto Components Inventory: Previous Autos Require Continued Upkeep (NYSE:AAP)


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Advance Auto Components, Inc. (NYSE:AAP) is a number one automotive aftermarket elements supplier in North America. The varieties of merchandise offered by the corporate embody elements & batteries, equipment and chemical compounds, and engine-related upkeep merchandise, resembling air filters and transmission fluid. Their prospects embody each professionals and DIYers. As of December 31, 2021, gross sales to professionals accounted for practically 60% of whole web gross sales.

As an aftermarket elements provider, AAP advantages from offering automotive options to older automobiles that want extra steady repairs & upkeep. Within the present market atmosphere, AAP is poised to learn from widespread affordability constraints of buying a car.

In Might 2022, the common new-vehicle transaction worth is predicted to achieve practically +$45K, which might be up 16% from 2021. Costs for used vehicles supply no higher different, with costs up practically 30% from January 2021. As such, there’s a larger chance of people holding onto their vehicles for so long as they’ll. In actual fact, the common age of automobiles on U.S. roadways reached a file excessive of 12.2 years in 2021. For AAP, this implies elevated demand for brakes and brake pads, batteries, tires, and different equipment.

AAP additionally advantages as whole car miles traveled will increase. In 2019, whole miles pushed reached 3.26T, earlier than plummeting to 2.83T throughout the top of the COVID-19 pandemic. The info has since improved and is now at or close to 2019 ranges. With elevated journey comes larger upkeep necessities.

U.S. Federal Highway Administration, Moving 12-Month Total Vehicle Miles Traveled [M12MTVUSM227NFWA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/M12MTVUSM227NFWA, May 28, 2022.

U.S. Federal Freeway Administration, Transferring 12-Month Complete Automobile Miles Traveled [M12MTVUSM227NFWA], retrieved from FRED, Federal Reserve Financial institution of St. Louis

With the wind at their again from an getting old car fleet and whole miles pushed, one wouldn’t anticipate AAP to be underperforming the broader market. But, AAP is down practically 20% YTD, which is worse than the S&P’s 13% decline over the identical interval. For buyers searching for an under-the-radar play within the automotive sector, AAP is one title price further consideration.

Earnings Evaluation and Different Reportable Occasions

Within the first quarter ended April 23, 2022, AAP reported whole web gross sales of +$3.4B, which was up 1.3% from the identical interval final 12 months, however +$20M wanting estimates.

Via the primary ten weeks of the 12 months, AAP had a powerful begin, with YTD comparable retailer gross sales up mid-single digits. The ultimate six weeks, nonetheless, got here underneath stress from flagging DIY gross sales, leading to mid-single digit declines in comparable gross sales.

Weighing on the DIY comparisons have been the impacts of financial stimulus funds within the prior 12 months and a slower begin within the present interval, particularly within the northern areas, attributable to colder and wetter climate patterns.

Regardless of weak point in DIY, total comparable retailer gross sales have been up 0.6% from the prior 12 months and 25.3% on a two-year foundation. The rise represented the eighth consecutive quarter of comparable retailer gross sales development. Likewise, each adjusted working revenue and adjusted EPS grew for the eighth straight quarter.

Gross revenue margins got here in at 44.6%, which was flat in comparison with the prior 12 months. Contemplating the numerous enter price inflation over the previous 12 months, that is constructive information. Driving margins within the present interval have been enhancements in strategic pricing, offset by LIFO expense.

Q1FY22 Earnings Summary - Form 10-Q

Q1FY22 Earnings Abstract – Type 10-Q

SG&A expense as a proportion of web gross sales, however, was up 161 foundation factors, attributable to elevated inflationary pressures in retailer labor, along with larger gas and supply bills. Moreover, AAP incurred larger start-up prices from new retailer openings associated to their enlargement in California. The upper stage of SG&A finally weighted on working revenue and web revenue, with each down about +$50M for the quarter.

Wanting forward, AAP expects enhancements in DIY as a result of waning impacts of final 12 months’s stimulus package deal on comparisons. Moreover, administration affirmed full-year steering, which requires +$11.2B in whole web gross sales on the low finish and an adjusted diluted EPS vary of $13.30 to $13.85, which might peg shares at 14.51x to 13.94x ahead earnings, based mostly on the closing worth on Friday, Might 27, 2022.

Q1FY22 Earnings Release - FY22 Full-Year Guidance

Q1FY22 Earnings Launch – FY22 Full-Yr Steering

The Fundamentals

Author's Summary of Strength of Fundamentals

Writer’s Abstract of Power of Fundamentals

At quarter finish, AAP had +$139M in money readily available and +$1.2B obtainable on their unsecured revolving credit score facility. With +$6.1B in whole present belongings and +$5.1B in whole present liabilities, the corporate is satisfactorily capitalized to satisfy its short-term obligations. Since inventories account for practically 80% of whole present belongings, turnover is crucial in sustaining their liquidity place.

Author's Calculations of Various Short-Term Liquidity Ratios

Writer’s Calculations of Varied Brief-Time period Liquidity Ratios

Via the primary three months of 2022, AAP was capable of flip over their stock in about 277 days. That is in-line with their efficiency in 2021 and higher than in prior years. Stacked towards the timing of collections and funds, there have been 75 days through which the corporate required funding from sources apart from via their suppliers. That is progressively higher than the 101 days reported for 2019.

Author's Calculations of Days of Other Required Financing

Writer’s Calculations of Days of Different Required Financing

From a longer-term standpoint, AAP’s leverage stood at 3.5x TTM EBITDA. And the honest worth of whole debt at interval finish was +$1.1B. Aside from about $200M due in 2023, practically all debt is due within the years after 2026. Within the interim, the corporate’s robust curiosity protection ratio of 22x signifies the corporate is unlikely to expertise bother servicing their reoccurring curiosity obligations.

Author's Calculations of Various Long-Term Solvency Metrics

Writer’s Calculations of Varied Lengthy-Time period Solvency Metrics

Supporting AAP’s liquidity place and their long-term viability is their robust capacity to generate money from operations. Within the present interval, the corporate reported a web use of working money of +$55M, attributable to decrease web revenue and damaging working capital changes. However money flows are anticipated to catch up because the 12 months progresses, with a minimal of +$775M anticipated in free money flows (FCFs).

In 2021, AAP generated +$823M in FCF, which supplied over 5x dividend protection. Presently, the annual payout is $6.00/share for a yield of simply over 3%. From a protection standpoint, administration targets a payout ratio of between 35-45% of web revenue. In 2021, the ratio was simply 26%. So, the corporate does have ample respiratory room with their targets.

Author's Summary of Cash Flow Statement

Writer’s Abstract of Money Circulate Assertion

Dangers To Take into account

Total demand for AAP’s merchandise relies on a number of components that if impaired can negatively influence the corporate’s outcomes of operations. For instance, a lower within the whole variety of automobiles on the highway or within the variety of annual miles pushed may end up in decreases within the want for upkeep and repairs. Whereas miles pushed have been trending larger, hovering vitality costs are weighing on households throughout the nation. If predictions by analysts at JPMorgan Chase & Co. (JPM) are correct and gasoline costs attain $6, there’s a actual threat of demand destruction. This could possibly be within the type of switching to public transportation, ride-sharing, or different means, all of which might lead to structural headwinds for AAP.

In the newest submitting interval, outcomes have been partially impacted by a sluggish begin to the spring promoting season attributable to colder and wetter climate than the earlier 12 months. Larger total variability within the climate might lead to additional volatility in AAP’s enterprise. On one hand, milder climate leads to decrease failure charges of vehicle elements. On the opposite, customers might defer elective upkeep in prolonged intervals of rain and winter precipitation. Whereas there is a component of predictability to climate patterns, sudden adjustments may influence operations on a fabric foundation.

Continued advances in expertise, together with larger adoption charges of electrical or hybrid automobiles, along with a common improve within the high quality of automobiles manufactured, pose long-term threats to AAP. Electrical and hybrid automobiles, as an example, require much less frequent oil adjustments and fewer frequent repairs utilizing aftermarket elements. At current, many automobile executives anticipate greater than half of U.S. automobile gross sales to be EVs by 2030. If this involves fruition, AAP’s present enterprise mannequin could possibly be challenged.

Conclusion

An aged car fleet and steadily rising miles pushed are two present tailwinds for AAP. The corporate’s new DieHard EV battery can also be anticipated to catch on to these with electrical or hybrid automobiles who demand superior reliability and sturdiness of the lifetime of their batteries.

Regardless of a positive outlook, AAP is underperforming the broader market index and is buying and selling simply 11.5% above their 52-week low. Moreover, the corporate’s present ahead EV a number of is about 10.6x, which is discounted to comparable friends, resembling Real Components Firm (GPC), AutoZone, Inc. (AZO), and O’Reilly Automotive, Inc. (ORLY), who’re buying and selling at a mean a number of of 13.2x. At this valuation, shares in AAP could be price roughly $220, which might be practically 15% larger than present ranges.

Rising SG&A prices are headwinds which have already affected present interval earnings, however the firm continues to be on monitor with their full-year steering. A secure steadiness sheet that features +$1.3B in whole liquidity with restricted near-term debt maturities offers security towards uncertainty. Predictable money flows inherent within the restore and change market present additional assurance to buyers searching for portfolio safety.

At simply 14x ahead earnings, AAP is one title within the automotive sector that gives worth with cheap upside potential, along with a fully-covered dividend yielding over 3%. For buyers searching for so as to add to their diversified portfolios, maybe a pit cease at AAP is simply what a mechanic would suggest.



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