Shares of Advance Auto Parts, Inc. (NYSE:AAP) have gained more than 11% today after The Wall Street Journal reported last night that Jeffrey Smith’s Starboard Value would reveal a 3.7% stake in the company during the Capitalize for Kids, Sohn Canada Conference in Toronto today, where he is one of the presenters (John Khoury, Jacob Doft, Daniel Lewis, Howard Marks, and Mick McGuire are just a few of the other conference presenters).
The new stake in Advance Auto Parts comes just a day after Smith waded into the melee between Media General Inc (NYSE:MEG), Nexstar Broadcasting Group, Inc. (NASDAQ:NXST), and Meredith Corporation (NYSE:MDP), announcing that he would use his 4.5% stake in Media General to launch a proxy battle if necessary, to ensure shareholders get the best possible outcome in the case. Media General is in the process of acquiring Meredith, which Smith opposes, while being courted itself by Nexstar, which Smith believes would be a good partnership.
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Smith’s presentation on Advance Auto Parts, Inc. (NYSE:AAP), which was seen by The Wall Street Journal, will focus on how the parts supplier could dramatically improve its results by focusing on improving its margins and ensuring that its service stations are fully stocked each day. While Advance Auto Parts was up by about 7% year-to-date at yesterday’s close, that nonetheless trailed industry peers Autozone, Inc. (NYSE:AZO) and O’Reilly Automotive Inc (NASDAQ:ORLY), the latter of which was recently ranked by Goldman Sachs as one of the top quality stocks in the consumer discretionary sector. Autozone and O’Reilly Automotive have enjoyed gains of 17% and 26% this year respectively, thanks to growth in the sector fueled by the cheaper cost of gas.
Smith believes those gains are miniscule compared to what Advance Auto Parts, Inc. (NYSE:AAP) could reach, suggesting greater than 100% upside potential to more than $360 per share with a comprehensive effort made to improve its margins, which trail its aforementioned industry peers. Advance Auto Parts had previously stated its aim to achieve 12% operating margins by the end of 2016.
“We believe that the current market price of Advance does not fully reflect the value of its businesses and that opportunities exist within the control of management and the board of directors of the Company (the “Board”) to create substantial value for all shareholders,” Smith wrote.