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.

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