Advance Auto Parts Still Top Notch

By Sham Gad | May 22, 2012 AAA
Despite reporting a strong quarter yesterday, a weak outlook from Advance Auto Parts (NYSE:AAP) was enough to send shares skidding by over 15% as investors furiously dumped shares on heavy volume. The market interpreted that outlook as bad news for the industry and rivals AutoZone (NYSE:AZO) and O'Reilly Automotive (Nasdaq:ORLY) also fell by 6 and 7%, respectively.

Results
For the first quarter, AAP reported diluted EPS of $1.79, up 33% from the year ago quarter. Sales were up slightly to $1.9 billion from $1.8 billion quarter over quarter. Advance Auto continued its aggressive share buyback and reduced outstanding shares to 74 million from 81 million in the year ago period. Thanks to effective cost management, operating income margin grew to 11.5% from 9.8%, year over year. One of the most effective measures of value creation, return on invested capital, was 20% in the quarter, up from 18% a year ago.

SEE: The 5 Types Of Earnings Per Share

Yet shares fell hard, as management indicated that they are starting to see signs of a business slowdown that will affect second quarter sales. The company indicated that comp store sales would grow by the mid-single digits versus higher previous rates. The market felt this news was worth over $1 billion and moved quickly to erase over a billion dollars worth of market value.

Profit from Pain
To be sure, auto parts retailers have been on a tear for many years as they are inherently excellent businesses. In 2008, they were one of the few businesses whose shares prices advanced nicely. Over the past couple of years, as credit has become more available, new car sales have climbed, which reduces demand for auto repair parts. Strong results from newly reinvigorated carmakers like Ford Motor (NYSE:F) do indeed suggest that new car sales are slowly improving.

Still for the 2012 fiscal year, AAP expects diluted EPS to approximate $5.55 to $5.75 a share. After reaching a high of $92, shares now sit at around $68 after the share price plunge. AAP also announced a new $500 million share buyback program, equal to about 10% of the company based on the current market cap of $5.1 billion.

The Bottom Line
Despite new car sales, the general trend is that cars are getting older, so fiscal 2012 may not be as bad as the market seems to think right now. Factor in share buybacks and EPS could be very strong for fiscal 2012. However, even assuming the company's guidance is accurate at $68 a share, shares now trade for around 12 times earnings. That's very attractive for such a high quality business. Despite new car sales, the general trend is that cars are getting older, so fiscal 2012 may not be as bad as the market seems to think right now. Factor in share buybacks and EPS could be very strong for fiscal 2012. However, even assuming the company's guidance is accurate at $68 a share, shares now trade for around 12 times earnings. That's very attractive for such a high quality business.

SEE: 6 Bad Stock Buyback Scenarios

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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

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