Advance Auto Parts, Inc. (AAP): 1 Improving Stock You Should Consider Buying Right Now

After a gap of almost nine months, I decided to take a look at a stock about which I used to be quite bullish. Unsurprisingly, the stock has gained a tad over 13% since then, and has also managed to turn analyst sentiment from negative to positive. The last time I looked, Advance Auto Parts, Inc. (NYSE:AAP) was coming off a woeful quarter and it wasn’t expecting a bright future either.

Advance Auto Parts, Inc. (NYSE:AAP)Turning around

But the company has managed to stage a comeback over the past few months and its recently reported fourth quarter sent the stock soaring. Analysts lauded Advance Auto’s solid cost management and earnings performance, even though it didn’t record an improvement in revenue. Thus, even though same-store sales fell 1.9% from the prior-year period, gross margin improved 90 basis points while operating income was slightly better.

As a result, the company delivered a positive surprise of almost 16% on the bottom line and expects to keep the momentum intact this year as well. Management knows that they might face a tough environment as people are either buying or looking to buy new cars. But, they know that this will turn into an opportunity in the long term, even though it would hurt business in the short run.

Possible catalysts

However, it should also be kept in mind that average age of vehicles in the U.S. still exceeds 10 years, with around 52 million vehicles more than 16 years of age. This should help Advance Auto keep its revenue stream intact and help it in improving same-store sales.

In addition, Advance Auto also expects an increase in the number of vehicles more than seven years old, apart from a cold weather, to provide further thrust to the top line. Moreover, an expected decline in gas prices would be another tailwind for Advance Auto.

Some catching up to be done

But the company is taking some other steps as well in order to bring its same-store sales into green territory, and plug the gaps in its business. Advance Auto lags behind its peers AutoZone, Inc. (NYSE:AZO) and O’Reilly Automotive Inc (NASDAQ:ORLY) in terms of store presence with around 3,800 stores.

O’Reilly’s 4,000 stores in 42 states helped it record a 4.2% same-store sale growth in its recently reported fourth quarter. The company expects further growth this year, and its earnings guidance comfortably surpassed consensus forecasts, which shows us what a superior store count can do.

Similarly, AutoZone, with around 5,000 stores in the U.S. and Mexico, managed to improve its same-store sales slightly in its previous quarter. AutoZone is now looking at e-commerce for further growth and had entered into an agreement to acquire online retailer AutoAnything in the previous quarter.

The right moves

To catch up with these heavyweights, Advance Auto stepped on the gas in the previous quarter and opened 137 new stores in fiscal 2012, its best ever new store count in the last five years. It acquired 21 stores of the erstwhile Strauss Auto Parts to improve its presence in New York. Advance Auto calls these new stores its best performing new stores opened in the past 10 years, and expects them to improve sales by 3% going forward.

In addition, Advance Auto is also focused on improving its presence in the commercial space. It acquired BWP, which is well-positioned in the Northeast commercial market. This acquisition is expected to aid Advance Auto’s commercial initiatives by adding $170 million to $180 million in revenue this fiscal year. The company’s results in the previous quarter were driven by its initiatives in the commercial business and it is intent on improving it further through its B2B e-commerce website.

The takeaway

Advance Auto is gradually looking to improve its business and it is making the correct moves. While improvement in sales of new cars might create a short-term pressure, it goes without saying that vehicle owners will ultimately turn to aftermarket retailers such as Advance Auto for maintenance. The company’s new stores should start contributing positively to same-store sales in the future and its advances in the commercial space are noteworthy.

Also, the stock seems fairly valued at a trailing P/E of 15.1 times and a forward P/E multiple of 12.9 times suggests that earnings growth is on the way. Moreover, a small dividend yield of 0.30% is another perk that potential investors would enjoy if they decide to buy this stable and steadily improving stock.

The article 1 Improving Stock You Should Consider Buying Right Now originally appeared on Fool.com and is written by Harsh Chauhan.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!