AAP Stock Chart: Did You Miss a Profitable Secular Grower?

• The chart shows the performance of aftermarket automotive products supply and distribution firm Advanced Auto Parts, over the last 3 years
• Since 2018 the stock has risen over 50%
• We have been proponents of investing in companies that make what you need, not what you want, particularly in times like today, as explained in our white paper, quick take, and in this whitepaper
• These are the type of rallies or runs that can evoke that sense of having “missed it”
• While currently out of fashion, KCR thinks about buying stocks as becoming a fractional owner of the underlying company – something we believe is best done for the long-term

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AAP Stock Chart: Absolute Return

Please click here to see why our proprietary ranking model likes the stock. Below the chart, we provide some simple but compelling reasons why the company may be a solid long-term investment.

AAP’s Stock Price Relative to the Market: The Case for Investigation

The chart below shows the same chart as the one above. The only difference? The chart below shows AAP’s price performance relative to the S&P 500 over the last three years. Despite the massive run since March of 2020, it is still severely underperforming over the last three years. We find the stocks merits to be many. Particularly since auto-parts stocks can be a terrific way to help recession proof your portfolio unlike cleantech solar stock. During economic downturns people often buy more parts as they work to keep their cars on the road longer creating countercyclical industry trends.

How badly has the stock underperformed? The chart below shows that if the S&P500 just stayed flat, AAP would have to rise 29% to merely catch up with the broad index!

For the sake of clarity, KCR is not going to make an AAP stock forecast or set a fixed price target like Wall Street Analysts. Our models seek to exploit the behavioral errors that have plagued investors since time immemorial. One of our core beliefs is that what you pay matters. As we explained in our piece introducing KCR’s “Glamour Stock Index” our research team believes that narrative story stocks have inhaled investor capital creating unusual discounts in high-quality firms.

The chart below shows that AAP is trading at a record discount compared to the S&P 500 based on a simple P/S metric. We believe the discount may be unwarranted. The distribution of aftermarket automotive parts is an attractive GDP+ growth story, and we believe AAP’s self-help story, emphasis on profitability, and shareholder returns make it attractive.

AAP generates a healthy 5% free cash flow yield and has grown earnings over the last three years by 16%. Considering the company’s investment-grade rating and the recession-resistant nature of the industry, KCR believes the stock may offer investors relative safety in a market characterized by obscenely valued story stocks and record leverage.

The data below is our Single Company Heat Map for AAP. For all numbers, higher is better. The basics:

• Valuation Quintile 4: AAP is relatively cheap on E/P and S/EV. FCF/EV is in the 73^rd percentile as the stock generates a solid 5% FCF/EV, which is 40% higher than the S&P 500 ex-financials
• Balance Sheet Quintile 4: AAP has a solid score on balance sheet quality, and they have increased their dividend steadily over the last 5 years and have a healthy buyback yield
• Earnings Quality 4: the stock has high-quality earnings with terrific scores on change in inventory relative to sales. The company also has a solid ROE (20%) and ROA (5%)

Read on to see some basic notes from Advanced Auto Parts Investor Relations Presentation.

Summarily, the following make AAP an interesting candidate for research in our view:

• Terrific industry fundamentals that underpin strong organic top-line growth potential
• A well-thought-out and compelling “self-help” story focused on expanding margins
• An investment-grade balance sheet overseen by a management team focused on total shareholder returns via capital appreciation, a solid quarterly dividend, and a healthy buyback program

Quick Facts from AAP’s Investor Relations Presentation

Advanced Auto Parts Inc engages in the supply of aftermarket automotive products for both professional installers and DIY repair.

Industry: Top Line Growth Outlook

Auto parts are generally viewed as highly resistant to recessions as people are committed to basic transportation. Covid provided an unusual negative shock to the industry due to a collapse in miles driven – a situation which has already reversed sharply and should help AAP’s sales.

Industry: Positive Top-Line Growth Outlook

Aside from miles driven, this industry dynamic is supported by a growing and aging fleet of vehicles that will need more maintenance.

Self Help: A Potential Tailwind for Sales Growth & Margin Expansion

AAP’s full investor presentation is over 60 pages long and filled with terrific details. KCR will do a horrible job summarizing their detailed plans by saying: they have a tremendous number of internal levers to grow revenues by taking market share while expanding margins and continuing to generate significant FCF. These “levers” include but are not limited to:

• improving outdated technology
• advancing their in-house brands (DieHard, Autopart International and Carquest)
• improving delivery times while reducing costs and optimizing pricing
• increasing SKU availability by streamlining an inefficient supply chain and fulfillment process
• high future customer “capture” through their WORLDPAC and Carquest training & technical institutes

In an industry short technicians, that last one may be a nontrivial long-term opportunity in our view as AAP has trained more techs than any other parts supplier.

Self Help: A Potential Tailwind for Sales Growth & Margin Expansion

Another long-term method for them to take share is by consolidating underperforming stores and growing in geographies where they have low penetration and large car parks.

Shareholder Focus: The Benefits of a Strong Balance Sheet and Healthy FCF

With the company’s estimated annual free cash flow of $575ml – $1bn p.a. through 2023, the firm has committed to not just growing but paying investors to own the stock. As the slide below shows, they intend to reward stockholders by paying a regular dividend and opportunistically buying back stock to further increase your stake in the company’s earnings.

As always, we encourage investors to do their own homework!! We would also like to thank the IR and management team for their stellar disclosure and wish them well on what sounds like a terrific opportunity.