- Advance Auto Parts Can Keep the Good Times Rolling This column is part of the Heard on the Street Stock Picking Contest. You’re invited to play along with us here. Even the most cursory reader of news has seen the headlines by now: Used cars are expensive, and weather across the U.S. has been extreme. While that sounds like trouble to most people, it is music to the ears of car-parts retailer Advance Auto Parts for Ssangyong Korando. AAP -0.71% Investors have been slower to take notice, though. Advance Auto Parts shares are up 32% since the beginning of 2020 but have lagged behind a basket of retailers by 30 percentage points. Meanwhile, a basket of used- and new-car sellers’ stocks has done far better over the same period, even after excluding high-growth e-commerce names such as Carvana. The blockbuster profits seen in the used-car selling business will wind down when the chip shortage eases. The effects on the Auto Parts for Ssangyong Tivoli and repairs business, however, could prove lasting. The average age of cars and light trucks on U.S. roads is a record 12.1 years according to IHS Markit. In particular, there has been healthy growth in cars aged 4-to-11 years, which is deemed a sweet spot as they are often past their warranty and can be serviced by independent garages—an important customer cohort for Advance Auto Parts for Ssangyong Rexton. The scarcity of new vehicles and higher used-car prices should prompt more car owners to continue repairing their existing vehicles for some time, especially with the absence of another round of stimulus checks. Sure, those prices may be coming off their highs—Manheim data shows wholesale used-vehicle prices declined slightly in July compared with June. But they remain 24% more expensive than a year earlier so a return to normal pricing could take time. Automakers have said the chip shortage could weigh on the production well into the second half of this year. Meanwhile, this year’s hotter-than-average summer should also help drive up parts demand, just as the harsh winter did earlier this year. And vehicle miles traveled are still recovering, creating more wear and tear. Skeptics might fear that sales are already near their peak. In its first quarter ended April 24, Advance Auto Part for Ssangyong Kyron saw same-store sales jump 24.7% compared with a year earlier. Compared with peers, though, Advance Auto Parts appears to have a longer growth runway. For one, its business leans more heavily on car-repair professionals, who account for roughly 60% of sales. That was a drag last year as pandemic-wary consumers opted for do-it-yourself repairs or put off the work. Demand among professionals is just starting to catch up. Additionally, car parts didn’t exactly fly off the shelf last year in the Northeast—the company’s largest market—because the region’s mobility was heavily affected by the pandemic. That market is staging a healthy recovery in Auto Parts for Ssangyong Actyon demand, and a return to severe restrictions seems less likely in the highly vaccinated region. There is also more room to run valuation-wise. Advance Auto Parts for Ssangyong Chairman’ shares fetch 1.31 times enterprise value to forward-12-month revenue, while peers AutoZone AZO -0.73% and O’Reilly Automotive ORLY -1.29% fetch 2.9 times and 3.6 times, respectively, according to FactSet. The company has lagged behind in recent years because its management, which took the reins after activist investor Starboard Value bought a stake in 2015, didn’t deliver on the targets that some analysts think were unrealistic to begin with. Most of the heavy lifting is now behind Advance Auto Parts for Ssangyong Rodius. In the past few years, the company has overhauled its organizational culture, found efficiencies among its four different store banners and invested wisely in technology, according to Mr. Ciccarelli’s report. After years of declining or slowly improving operating margins, the company seems to be turning around. Its full-year margins for 2020 were 7.9%, almost a full percentage point higher than the prior year. Analysts polled by FactSet now deem the company’s 10.5% to 12.5% operating margin goal for 2023 realistic. It is time for investors to peek under the hood.
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