Shares in auto parts retailer Advance Auto Parts (NYSE:AAP) climbed by over 8% to a new high on strong fourth quarter earnings results that smashed estimates. Business continues to benefit from a slow growth economy in which consumers continue to hold on to cars longer.
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Pedal to the Metal
For the fourth quarter that ended on Dec. 31, 2011, Advance Auto reported earnings per share (EPS) of 90 cents, a 58% increase over the year ago quarter. Analysts were expecting EPS of 70 cents. For the year, EPS increased by 29% to $5.11 a share. Sales of $1.3 billion during the quarter compared with $1.27 billion in the year ago period. Comparable stores sales grew by 2.9%, a decline of 6 percentage points from the 2010 quarter. Normally such a decline for a retailer would be enough to send investors looking for the exits but something fantastic is going at Advance Auto: massive share buybacks. At the end of 2011, shares outstanding stood at 77 million compared with 87 million at the end of 2010. During 2011, the company bought back 10 million shares, more than 10% of the company, for an average price of $61.51 a share. With shares now sitting at $87, Advance Auto is doing something very few companies do effectively: buyback shares of an undervalued stock. In fact, the company is taking a page from AutoZone (NYSE:AZO), the nation's largest auto parts retailer which has bought back over 70% of its share in the past decade. Over the past five years, AutoZone shares are up 150% versus a negative return for the S&P 500. (For related reading, see A Breakdown Of Stock Buybacks.)
The Bottom Line
Advance shows no signs of slowing down in 2012. For the full year, the company is forecasting EPS of $5.55 to $5.75. Yet, that number could very well be a low ball figure if the company continues its share repurchase program. Despite the $87 share price valuing the company at $6.38 billion, Advance Auto still trades at multiples below its industry peers. It trades for less than one times sales and a forward P/E of 13. By comparison, AutoZone trades for 1.7 times sales and a forward P/E of 14 while O'Reilly Automotive (Nasdaq:ORLY) trades for 1.7 times sales and 13.5 times forward earnings. Even small cap Dorman Products (Nasdaq:DORM) trades for 1.6 times sales and 13.7 times forward earnings.
Given the valuation disconnect between AAP and its industry peers, it's no surprise that AAP shares jumped 8% on the solid earnings report. Going forward, that same disconnect will likely properly shares significantly higher in 2012.
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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.