Advance Auto Components, Inc. (NYSE:AAP) is a number one automotive aftermarket components supplier in North America. The forms of merchandise offered by the corporate embrace components & batteries, equipment and chemical substances, and engine-related upkeep merchandise, akin to air filters and transmission fluid. Their clients embrace 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 components 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 profit from widespread affordability constraints of buying a car.
In Might 2022, the typical new-vehicle transaction value is anticipated to achieve practically +$45K, which might be up 16% from 2021. Costs for used automobiles supply no higher different, with costs up practically 30% from January 2021. As such, there’s a higher chance of people holding onto their automobiles for so long as they’ll. In truth, the typical 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 through the peak of the COVID-19 pandemic. The information has since improved and is now at or close to 2019 ranges. With elevated journey comes higher upkeep necessities.
With the wind at their again from an getting older 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 traders looking for an under-the-radar play within the automotive sector, AAP is one title value additional consideration.
Earnings Assessment 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 beneath stress from flagging DIY gross sales, leading to mid-single digit declines in comparable gross sales.
Weighing on the DIY comparisons had 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, because of colder and wetter climate patterns.
Regardless of weak point in DIY, total comparable retailer gross sales had 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 progress. 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 value inflation over the previous 12 months, that is optimistic information. Driving margins within the present interval had been enhancements in strategic pricing, offset by LIFO expense.
SG&A expense as a share of web gross sales, however, was up 161 foundation factors, because of elevated inflationary pressures in retailer labor, along with greater gasoline and supply bills. Moreover, AAP incurred greater 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 bundle on comparisons. Moreover, administration affirmed full-year steerage, 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, primarily based on the closing value on Friday, Might 27, 2022.
The Fundamentals
At quarter finish, AAP had +$139M in money readily available and +$1.2B accessible on their unsecured revolving credit score facility. With +$6.1B in whole present belongings and +$5.1B in whole present liabilities, the corporate is sufficiently capitalized to fulfill its short-term obligations. Since inventories account for practically 80% of whole present belongings, turnover is essential in sustaining their liquidity place.
Via the primary three months of 2022, AAP was in a position to flip over their stock in about 277 days. That is in-line with their efficiency in 2021 and higher than in prior years. Stacked in opposition to the timing of collections and funds, there have been 75 days wherein the corporate required funding from sources aside from by their suppliers. That is progressively higher than the 101 days reported for 2019.
From a longer-term standpoint, AAP’s leverage stood at 3.5x TTM EBITDA. And the truthful worth of whole debt at interval finish was +$1.1B. Apart from about $200M due in 2023, practically all debt is due within the years after 2026. Within the interim, the corporate’s sturdy curiosity protection ratio of 22x signifies the corporate is unlikely to expertise hassle servicing their reoccurring curiosity obligations.
Supporting AAP’s liquidity place and their long-term viability is their sturdy capability to generate money from operations. Within the present interval, the corporate reported a web use of working money of +$55M, because of decrease web revenue and adverse 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 offered 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 respiration room with their targets.
Dangers To Think about
General demand for AAP’s merchandise relies on a number of components that if impaired can negatively affect the corporate’s outcomes of operations. For instance, a lower within the whole variety of automobiles on the street or within the variety of annual miles pushed can lead to decreases within the want for upkeep and repairs. Whereas miles pushed have been trending greater, hovering vitality costs are weighing on households throughout the nation. If predictions by analysts at JPMorgan Chase & Co. (JPM) are correct and fuel 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 latest submitting interval, outcomes had been partially impacted by a gradual begin to the spring promoting season because of colder and wetter climate than the earlier 12 months. Higher total variability within the climate could lead to additional volatility in AAP’s enterprise. On one hand, milder climate ends in decrease failure charges of vehicle components. On the opposite, customers could defer elective upkeep in prolonged intervals of rain and winter precipitation. Whereas there is a component of predictability to climate patterns, sudden modifications might affect operations on a fabric foundation.
Continued advances in expertise, together with greater adoption charges of electrical or hybrid automobiles, along with a common enhance within the high quality of automobiles manufactured, pose long-term threats to AAP. Electrical and hybrid automobiles, as an illustration, require much less frequent oil modifications and fewer frequent repairs utilizing aftermarket components. At current, many automobile executives anticipate greater than half of U.S. automotive gross sales to be EVs by 2030. If this involves fruition, AAP’s current enterprise mannequin could possibly be challenged.
Conclusion
An aged car fleet and steadily growing miles pushed are two present tailwinds for AAP. The corporate’s new DieHard EV battery can 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 good 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, akin to 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 value roughly $220, which might be practically 15% greater than present ranges.
Rising SG&A prices are headwinds which have already affected present interval earnings, however the firm continues to be on observe with their full-year steerage. A steady steadiness sheet that features +$1.3B in whole liquidity with restricted near-term debt maturities supplies security in opposition to uncertainty. Predictable money flows inherent within the restore and change market present additional assurance to traders looking for portfolio safety.
At simply 14x ahead earnings, AAP is one title within the automotive sector that gives worth with affordable upside potential, along with a fully-covered dividend yielding over 3%. For traders looking for so as to add to their diversified portfolios, maybe a pit cease at AAP is simply what a mechanic would advocate.