AAP Stock Study (10-26-23)

I recently did a stock study on Advance Auto Parts Inc. (AAP) with a closing price of $49.84.

Value Line writes:

     > Advance Auto Parts, Inc. is a leading retailer of aftermarket auto
     > parts and accessories. Serves both the DIY and professional markets.
     > As of 12/31/22, operated 4,770 stores and 316 branch locations in
     > the U.S., Canada, Puerto Rico, and the Virgin Islands, primarily
     > under the Advance Auto Parts, Autopart International, Carquest, and
     > Worldpac banners. In addition to the 330 Carquest locations that
     > the company owns, serves approx. 1,310 independently owned stores
     > that operate under the Carquest name. Has about 40,000 full-time
     > employees and 27,000 part timers.

Over the past decade, this large-size company has grown sales and EPS at annualized rates of 3.6% and 4.4%, respectively. Lines are somewhat up and parallel but certainly not straight with sales declines in ’15, ’16, and ’17 along with EPS declines in ’15, ’16, ’18, and ’22. For me, visual inspection does not clear the barbed wire fence. I will continue the study for purposes of interest and the possibility of a speculative [not core] position.

Over the past decade, PTPM trails peer and industry averages while declining from 9.6% (’13) to 5.8% (’22) with a last-5-year mean of 6.4%. ROE leads industry averages while tracking evenly with peers in declining from 26.4% (’13) to 18.0% (’22) with a last-5-year mean of 13.6%. Debt-to-Capital is lower than peer and industry averages despite increasing from 41.0% (’13) to 57.7% (’22) with a last-5-year mean of 44.5%.

Quick Ratio per M* is a worrisome 0.21, but Interest Coverage per Value Line is 21.3. Value Line gives a “B+” rating for Financial Strength.

With regard to sales growth:

• CNN Business projects flat growth YOY and 1.3% per year for ’23 and ’22-’24, respectively (based on 19 analysts).
• YF projects YOY 1.0% and 1.9% for ’23 and ’24, respectively (22 analysts).
• Zacks projects YOY 1.0% and 2.0% for ’23 and ’24, respectively (8).
• Value Line projects 2.4% annualized growth from ’22-’27.
• CFRA gives ACE of 1.0% YOY and 1.8% per year for ’23 and ’22-’24, respectively.
• M* provides a 2-year ACE of 1.4% annualized growth.

I am forecasting toward the lower end of the range at 1.0% per year.

With regard to EPS growth:

• CNN Business projects contraction of 53.5% YOY and 28.9% per year for ’23 and ’22-’24, respectively (based on 19 analysts), along with 5-year annualized contraction of 14.8%.
• MarketWatch projects growth of 17.7% YOY and 18.5% per year for ’24 and ’23-’25, respectively (27 analysts).
• Nasdaq.com projects growth of 18.2% YOY and 16.9% per year for ’24 and ’23-’25 (12/12/6 analysts for ’23/’24/’25).
• Seeking Alpha projects 4-year annualized contraction of 11.3%.
• YF projects YOY 64.3% contraction and 18.5% growth for ’23 and ’24, respectively (24), along with 5-year annualized contraction of 14.7%.
• Zacks projects YOY 64.2% contraction and 18.2% growth for ’23 and ’24, respectively (12), along with 5-year annualized growth of 11.4%.
• Value Line projects 5.2% annualized contraction from ’22-’27.
• CFRA projects contraction of 62.8% YOY and 29.1% per year for ’23 and ’22-’24 along with a 3-year CAGR of -18.0%.

My -9.0% per year forecast is toward the lower end of the long-term-estimate range (mean of five: -6.9%). For low EPS, I will use a growth rate of -15.0%, which is rounding down the bottom of that range. These result in high and low EPS values of $5.16 and $3.67/share, respectively.

My Forecast High P/E is 21.0. Over the past decade, high P/E increases from 21.0 (’13) to 29.6 (’22) with a last-5-year mean of 27.6 and a last-5-year-mean average P/E of 21.6. I am forecasting at the bottom of the range.

My Forecast Low P/E is 10.0. Over the past decade, low P/E ranges from 10.0 in ’20 to 22.3 in ’15 with a last-5-year mean of 15.6. I am forecasting at the bottom of the range.

My Low Stock Price Forecast (LSPF) of $36.70 is default based on $3.67/share initial value. This is 30.4% less than the previous closing price and 23.1% less than the 52-week low.

Payout Ratio ranges from 3.5% in ’19 to 4.5% in ’13 before blasting off to 14.0%, 34.0%, and 72.6% in ’20, ’21, and ’22, respectively. I am forecasting below the range at 3.0%.

These inputs land AAP in the BUY zone with a U/D ratio of 4.5. Total Annualized Return (TAR) is 17.0%.

PAR (using Forecast Average—not High—P/E) of 10.1% is decent for a large-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I start by comparing my inputs with those of Member Sentiment (MS). Based on only 28 studies (my study and 6 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 3.0%, 8.5%, 24.1, 14.8, and 9.5%, respectively. I am lower across the board. Value Line’s projected average annual P/E of 13.0 is less than MS (19.5) and less than mine (15.5).

MS high / low EPS are $11.28 / $5.83: much higher than my EPS range given above. With MS having the low sample size, I am not surprised to see big differences. Value Line’s high EPS is $10.00. I am lowest of the three by a substantial amount.

MS LSPF of $63.60 (invalid on today’s date) implies a Forecast Low P/E of 10.9: less than the above-stated 14.8. MS LSPF is 26.3% less than the default $5.83/share * 14.8 = $86.28 (also invalid on today’s date), which results in more conservative zoning. MS LSPF is still 83.3% greater than mine. Again, with MS having the low sample size, I am not surprised to see big differences (along with invalid ranges).

My TAR (over 15.0% preferred) is much less than the 38.8% from MS. Even discounting MOS relative to MS due to the low sample size, MS seems robust in the current study looking at my inputs relative to analyst estimates and historical ranges.

I track a few different valuation metrics. PEG is 0.94 per Zacks: slighly undervalued (something I very rarely see). Relative Value [(current P/E) / 5-year-mean average P/E] per M* is tremendously undervalued at 0.3. Kim Butcher’s “quick and dirty DCF” prices the stock at 11.0 * [$14.65 – ($4.00 + $5.65)] = $55.00: undervalued by 10.4%. Although I usually see these metrics conflict, they all agree here.

AAP is clearly not a high-quality growth stock right now. It does seem to be dirt cheap and a potential “value play.” This conservative analysis has it a BUY under $54/share. Do realize, though, that per Value Line the stock is down just over 60% over the last year, 3 years, and 5 years. Any investment should probably be done small in the speculative portion of the portfolio (if there is one) in case the doldrums—or worse—are to continue.