Is Advanced Auto Parts worth investing in?

Back in April, we rated O’Reilly Automotive (ORLY) a 10/10. Frankly, we could have done the same for Autozone (AZO).

These stocks are up more than 400% and 30% respectively since mid-2017.

You know which stock isn’t? Advanced Auto Parts (AAP).

In fact, with its recent earnings swan dive, you’d be down overall.

Yet, like a bad accident, financial pros are rubber-necking to look at this ticker, sifting through the wreckage for a possible investment.

Not wanting to let them have all the fun, we took a look at the stock’s valuation after shares got cut in half over the last month.

Here’s what we found.

Advanced Auto Parts’ Business

If you own a car, chances are you’ve heard of Advanced Auto Parts, one of the largest retailers of aftermarket auto parts and accessories in the US. 

Whether you need a new battery, brake pads, oil filter, or windshield wipers, AAP has you covered. You can shop online or visit one of their over 4,800 stores nationwide. They also offer free services such as battery testing, installation, and recycling, as well as a loyalty program that rewards you with discounts and coupons.

Source: 2022 AAP Annual Report

AAP caters to both do-it-yourself (DIY) customers and professional installers, such as mechanics, dealerships, and fleet operators. 

The company sells auto parts and accessories at a markup from their wholesale suppliers. Customers can shop in-store or through their online platform, which allows customers to order products online and pick them up in-store or have them delivered to their homes or businesses.

Parts and batteries make up 2/3rds of the sales, while accessories and chemicals are roughly 1/5th.

Source: 2022 AAP Annual Report

Despite its strong market position and loyal customer base, AAP suffers from inept management.

The company reported disappointing results for the third quarter of 2023, missing analysts’ expectations on both revenue and earnings. AAP’s revenue fell 2.4% year-over-year to $2.48 billion, while its earnings per share dropped 10.4% to $1.98. The company also lowered its guidance for the full year, citing supply chain disruptions, labor shortages, and inflationary pressures as the main challenges.

AAP’s performance is abysmal when compared to AZO’s last report, which included an 11% YoY sales increase and 17.4% earnings growth and mentions of the same headwinds.

Financials

Source: Stock Analysis

The problems plaguing AAP aren’t anything new. It’s acquisitions of CARQUEST and WOLDPAC increased its exposure to the professional segment, adding costs and complexity. And it turns out professionals are much less loyal and resilient than the DIYers, the group making up 80% of Autozone’s sales.

AAP never achieved efficient operations, often stuck with bloated inventory and expensive supply chains.

All this culminates in a company with single-digit sales growth during its best years, with margins that never seem to improve.

Did we mention the debt? 

That exploded from $1.2 billion to $1.8 billion last quarter, while interest expenses went from $12 million in October to $29.7 million last quarter.

Valuation

Source: Seeking Alpha

Sure, AAP is cheap. It trades at the lowest price-to-earnings multiple, and the second lowest price-to-sales and price-to-cash-flow multiple, only behind Goodyear Tire (GT), which arguably hasn’t done well the last several years either.

All the other auto parts stocks, including Genuine Parts Company (GPC), trade at higher multiples because they deliver better sales growth and margins.

Growth

Source: Seeking Alpha

AAP’s 5-year average revenue growth of 3.7% is the worst of the group. The other two main competitors, AZO and ORLY, have done much better, with sales up an average of 12.3% and 13.2%, respectively.

The negative EBTIDA growth for AAP is just another sign of how bad things are for the company.

Profitability

Source: Seeking Alpha

Don’t let the decent gross margins fool you. AAP has one of the lowest EBIT and net income margins of the group.

Again, GT doesn’t look so good either. But it’s a tire company with markedly different business model.

Our Opinion 0/10

AAP is in an industry facing real headwinds from supply chain slowdowns to higher labor and material costs.

Yet, they’re also the worst-run company of the group.

While they might be a great place to shop, you’re better off with either AZO or ORLY.

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