Sunday, March 14, 2010

DIY For Cars – Advance Auto Parts Inc.

My wife drives a nine-year old car and mine is six years old. Both are in good shape, requiring only periodic maintenance and minor repairs. Like many other Americans, I am holding to my cars. To meet my needs, I go to Advance Auto Parts, Inc., (AAP) stores for parts.

The Company is a specialty retailer of automotive aftermarket parts, accessories, batteries and maintenance items primarily operating within the United States. Their stores carry an extensive line of product for cars, vans, sport utility vehicles and light trucks. AAP serves both Do-It-Yourself and commercial customers. At the close of the reporting quarter, then Company operated 3,420 stores throughout 39 states, Puerto Rico and the Virgin Islands. The Company also sells product over the internet.

The poor economy is the Company’s biggest and most intractable risk. It hits them at both ends of their operations in that Advance Auto Parts suppliers are at risk and customers are affected by inflation, unemployment, credit issues, etc.

By The Numbers

Total sales for FY09 increased 5.3% over FY08 to $5.412 billion from $4.844 billion. Sales growth was primarily due to a comparable store sales increase of 5.3% and sales from the net addition of 52 total stores opened within the reporting year. For the quarter ending 01/09, sales totaled $1,143.6 million. This provided a Q-O-Q decline of 4.0% from 4Q08. Historically, sales have been growing at 5.3%, 5.4%, 7.5% and 7.8% for the past 1-year, 3-year, 5-year and 7-year periods, respectively. This suggests a fairly stable and predictable history.

In FY09, net income increased by 13.4% over the prior year. Net income for FY09 totaled $269.0 million and compared to $237.1 million in FY08. Similarly, EPS (Diluted) increased to $2.83 from $2.49 providing a 14.1% Y-O-Y increase. For the quarter ending 01/10, EPS was $0.36 as compared to $0.26 in the year ago quarter. However, quarterly EPS was substantially below analyst expectations.

Management has provided some guidance for FY10. They project earnings in the $3.20 to $3.40 range. Analyst estimates are more conservative. They range from $3.00 to $3.37 and average $3.26. Many analysts are revising their estimates down based on the disappointing results from the last quarter. Measured Approach is estimating EPS (basic) at $3.06.

The Company’s gross profit margin remains strong and consistent. It increased by 2.2% in FY09 from 46.7% to 48.9%. Operating margins remain strong at 8.4%. These margins are an improvement over FY08 margin of 8.1%. Historically, operating margins have ranged from a high of 9.6% to a low of 8.1%.

AAP has not increased its dividend since it started paying a dividend in 2006. The current dividend rate is $0.24 per share per year. The current yield is a paltry 0.6%. The payout ratio is about 8.4%.

The Company is a consistent producer of free cash flow. For the most recent twelve month period, free cash flow totaled $5.09 per share. The Consistent increase in free cash flow is a reflection of increases in cash flow rather than reductions in CapEx.

The balance sheet is strong. AAP reported Cash and ST Investments of $100.0 million at the close of FY09 and Long Term Debt of $202.9 million. Total Liabilities to Total Assets is a manageable 58.3% and less than the industry median. Long Term Debt to Capital is 13.7% and Long Term Debt to Equity is 15.8%.

Return on Equity for the year ending 01/10 is 22.8%. The average ROE for the past seven years is a robust 21.7%.

Price Target

The Wall Street Journal reports that 20 analyst price targets range from a low of $36 to a high of $55. The mean price target is about $46. Measured Approach has a price target of $54.70 based on a PE of 17X on $3.26 EPS and a DCF estimate of $52.

DISCLOSURE: Author is long AAP.

Tuesday, March 2, 2010

Endo Pharmaceuticals – Steady Growth

We first wrote about Endo Pharmaceuticals in a blog post on March 22, 2009. We recommend Endo then and we reiterate that recommendation now.

“Endo Pharmaceuticals Holdings Inc., is a specialty pharmaceutical company in pain management. The Company is engaged in the research, development, sales and marketing of branded and generic pharmaceutical products primarily to treat and manage pain. Its portfolio of branded products includes Lidoderm, Opana ER, Percocet, and Frova. It concentrates on generics that have one or more barriers to market entry, such as complex formulation, regulatory or legal challenges or difficulty in raw material sourcing. During the year ended December 31, 2008, the branded products and non-branded generic portfolio comprised approximately 93% and 7%, respectively, of the Company's net sales. It markets its branded pharmaceutical products to prescribing physicians in pain management, neurology, surgery, anesthesiology, oncology and primary care. In March 2009, Endo Pharmaceuticals Holdings Inc. completed the acquisition of Indevus Pharmaceuticals, Inc.”

Recently, Endo released its most recent financial results and announced its expectations for the coming year. Endo forecasted 2010 earnings of $2.40 to $2.45 share. Adjusted earnings should come in between $3.15 and $3.20 a share, on revenue of $1.55 billion to $1.6 billion. A poll of analysts by Thomson Reuters estimated earnings of $2.87 a share, on revenue of $1.53 billion.


(Standard & Poor's)

Q4 adjusted EPS of $0.81, vs $0.74, is well ahead of our $0.67 estimate due to tax benefits. ENDP challenges filing for generic version of Lidoderm, which we see protecting franchise to mid-'12. We view ENDP's cost leverage to support EPS growth and acquisitions favorably, but see limited pipeline visibility to drive long-term revenues as legacy products near exposure to generics in coming years. On lower expense and tax outlook, we raise our '10 adjusted EPS estimate by $0.36 to $3.20 and set '11's at $3.45, but we keep our target price of $24 on pipeline uncertainties.”

The risks related to Endo are fairly obvious to discern. Some 52% of sales revenue is derived from Lidoderm alone and 91% of sales revenue are from branded products. There is litigation involving a generic version of Lidoderm and the remaining branded products are coming off patent protection within several years. These factors place immediate pressure on Endo.

What does ENDO have in the pipeline? The Company generates about 9% of net sales from generics. We believe there is significant room to expand in this area where margins tend to be higher. ENDO currently has 15 ANDA submissions on file with the FDA; most of which have a product launch date in the foreseeable future. In addition, the Company is building upon its product line beyond the pain management market. It already has product in the urology market. They are adding to their endocrinology and oncology product lines.

Endo has a number of challenges which we believe are short term in nature. This uncertainty provides us with an opportunity to acquire ENDP at attractive prices.

By The Numbers

Quarterly EPS for the period ending December 31, 2009 were $1.25 as compared to $0.42 in the prior quarter and $0.62 in the year-ago quarter. EPS for FY 09 were $2.27 compared with FY 2008 EPS of $2.06. EPS grew at the rate of 10.2% y-o-y. Historically, EPS grew at the rate 29.7%, 15.8%, and 33.5% on 3 year, five year and 7 year basis, respectively. Analyst forecasts for FY 2010 EPS ranges from $2.85 to $3.20 with an average forecast of $3.16. The consensus is up from $2.84.

Quarterly sales for the period ending December 31, 2009 were $391.4 million as compared to $361.0 million in the prior quarter and $347.3 million in the year-ago quarter. Net sales for the year ending December 2009 were $1,460.8 million as compared to $1,260.5 million in FY 2008. Sales grew at the rate of 15.9% in 2009 as compared to 2008. The 3 year, 5 year and 7 year sales growth rates are 17.1%, 18.9% and 20.4%, respectively.

The Company has had positive free cash flow in each of the past seven fiscal years. In FY 2009, free cash flow was $2.51 per share, a 12.5% decline from the prior year.

Endo’s balance sheet is in good shape. Cash and short-term investments represented 39.6% of assets. The current ratio is 3.1X and liabilities to assets are 42.4%. Long term debt to capital is 24.8% and long term debt to equity is 33.0%.

The Company reports a respectable, and consistent, return on equity of 22.0%.

At recent prices, the P/E ratio at 10.1X is significantly less than the five year average of 16.3X. The P/B ratio, at 2.0X, is down from the five year average of 3.55X. Our price target of $32.00 represents a P/E of 11.25X on EPS of $2.85.

DISCLOSURE: Author is long ENDP.

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