Advance Auto Elements Inventory: Costly However Providing Upside (NYSE:AAP)

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One business that seems to be alive and properly is the automotive elements retail area. Between the truth that the financial system continues to develop and that extra vehicles than ever are on the street, and the truth that the common age of autos is rising, it is smart for the demand for automotive elements retail to rise with it. One of many leaders on this area is an organization referred to as Advance Auto Elements (NYSE:AAP). In recent times, the corporate has succeeded in rising its enterprise at a gentle clip. This has taken place whilst the shop depend that it operates declines. Progress continues into the current yr and shares within the enterprise appear to be priced at ranges that make sense. All issues thought-about, Advance Auto Elements seems to be an excellent prospect for long-term buyers.

Constructive developments

In August of this yr, I revealed an article about Advance Auto Elements whereby I referred to as the enterprise costly however indicated that it affords good upside potential. Finally, I rated the enterprise a bullish prospect. Because the publication of that article, shares have generated a return for buyers of about 9%. That will not seem to be a lot, however it dwarfs the two.2% return achieved by the S&P 500 over the identical time frame. At first look, you would possibly assume that this efficiency which is pushed by some basic issue, and you’ll be proper. Currently, efficiency by the corporate on each its prime and backside traces has been strong.

The truth that Advance Auto Elements would generate enticing development shouldn’t be shocking. After seeing income drop from $9.57 billion in 2016 to $9.37 billion in 2017, it has been climbing persistently. In 2020, gross sales got here in at $10.11 billion. That represents a rise of 4.1% over the 2019 figures. Such a rise throughout a time of utmost pandemic must be spectacular by itself. What is particularly outstanding is that this befell whilst the shop depend for the corporate declined from 5,189 to 4,976. It is essential to notice that this enlargement continues into the current day. For example, as of the top of the third quarter of its 2021 fiscal yr, the corporate generated income of $8.60 billion. That represents a rise of 11.1% over the $7.74 billion achieved the identical time one yr earlier. And as soon as once more, the shop depend of the enterprise continues to drop, hitting simply 4,961 as of the top of this quarter. That is as well as, after all, to the 1,325 unbiased Carquest places the corporate companies.

AAP revenue, net income, operating cash flow and EBITDA

*Created by Creator

With income rising, so too has profitability. Web earnings to date this yr has come out to $534.44 million. This compares favorably to the $381.02 million generated one yr earlier. Working money movement has been strong as properly, climbing from $809.22 million to $924.94 million. And EBITDA elevated from $827.50 million to $978.19 million. If present efficiency continues for the fourth fiscal quarter, then monetary efficiency on the corporate’s backside line will probably attain a file excessive.

For many who comply with the enterprise intently, file efficiency, not solely on the underside line however on the highest line as properly, shouldn’t be all that shocking. In spite of everything, administration is forecasting income for the present fiscal yr of between $10.90 billion and $10.95 billion. This compares to the prior anticipated vary of $10.60 billion and $10.80 billion. Though the corporate expects to open 30 new shops this yr, the majority of the expansion will probably be attributable to a 9.5% to 10% enhance in comparable retailer gross sales. Primarily based on present expectations, internet earnings must be round $508.43 million, whereas EBITDA must be about $1.08 billion. These figures examine to the $493.02 million and the $1.05 billion, respectively, that the enterprise generated in 2020. Working money movement estimates have been revised down, coming from $1.03 billion to $1 billion. However that may nonetheless be greater than the $969.69 million the corporate generated in 2020.

Shares are dear however not unreasonable

Taking all of those figures, we will successfully worth the enterprise because it stands immediately. Proper now, utilizing administration’s expectations for the total 2021 fiscal yr, Advance Auto Elements is buying and selling at a price-to-earnings a number of of 27.8. This compares to the 26.6 that I calculated after I final wrote concerning the agency. By itself, it is a reasonably dear a number of to pay. However in the event you have a look at it by way of the lens of working money movement, the image appears to be like extra favorable. The a number of on that foundation is 14.1. That’s really down from the 14.8 after I final wrote concerning the enterprise. In my prior article on the enterprise, I didn’t calculate the EV to EBITDA a number of, however that studying on a ahead foundation now appears to be like to be 13.5.

AAP estimates

*Created by Creator

To place these figures into perspective, I made a decision to match Advance Auto Elements to the 5 highest rated of its friends as outlined by Searching for Alpha’s Quant platform. On a price-to-earnings foundation, these firms ranged from a low of 6.6 to a excessive of 18.9. Of the group, our prospect was the costliest. Utilizing the value to working money movement method, the vary of the comparable companies is 3.4 to 7.4. As soon as once more, Advance Auto Elements is the costliest of the group. And utilizing the EV to EBITDA method yields a variety of three.1 to eight.5. And never surprisingly, our goal is costlier than any of these companies.

Firm Value / Earnings Value / Working Money Circulation EV / EBITDA
TravelCenters of America (TA) 18.9 3.4 3.1
AutoNation (AN) 8.5 6.2 6.6
Murphy USA (MUSA) 14.2 7.4 8.5
America’s Automobile-Mart (CRMT) 6.6 N/A 4.4
Lithia Motors (LAD) 8.6 4.7 7.9

Though it’s unlikely to be a major contributor to development anytime quickly, it’s also essential to notice that administration is specializing in innovating. In November of this yr, they introduced a brand new retail idea that they name Carquest by Advance. This specific idea will concentrate on the rising automotive DIY channel of consumers, particularly unbiased automobile house owners who would possibly already obtain further assist from Advance Auto Elements. By the top of this yr, the corporate intends to have twenty of those places in operation, 19 of that are being achieved in partnership with Baxter Auto Elements. Given the truth that the common car age on the street continues to climb, specializing in this sort of channel makes numerous sense and will repay for shareholders down the street.


At current, buyers could have a look at Advance Auto Elements and see an costly enterprise. That may be an correct description. However the truth that administration has continued to develop the enterprise even throughout the pandemic, and the truth that this development reveals no indicators of stopping, underscores simply how top quality the enterprise is. What’s extra, its internet debt is barely $153.14 million, which means that the chance of insolvency is virtually zero. So whereas the corporate is dear in comparison with different companies, it’s a cheap prospect for buyers to think about presently.

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