• 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

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. 

Advanced Auto Parts Absolute Performance over the Last Three Years

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.

Advanced Auto Parts Relative Performance vs SP500 over the Last Three Years

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!

Absolute Performance vs SP500

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 Price to Sales Ratio SP500 Price to Sales Ratio

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 73rd 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%)

AAP Single Company Heat Map January 2022

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.

Quick Facts from AAPs Investor Relations Presentation

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 Top Line Growth Outlook

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.

Industry Positive Top Line Growth Outlook

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 2

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.

Self Help A Potential Tailwind for Sales Growth Margin Expansion

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.

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

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. 

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.