Advanced Auto Parts Stock May Be Cheap for a Reason

Key Points

• Advanced Auto Parts stock is down more than 20% after reporting profits that were significantly below expectations.
• The company is making strategic moves to strengthen its core business, and may get a lift from lower interest rates.
• AAP stock may be attractive as a momentum trade, but buy-and-hold investors may need to wait for evidence of a turnaround.  

Advanced Auto Parts Inc. NYSE: AAP stock fell 3.8% on August 23, the day after the company reported significantly lower profits than analysts expected in the company's second quarter 2024 earnings report. However, that was after AAP stock plummeted nearly 20% in pre-market trading after the report dropped after the market closed on August 22. 

What made the drop even more concerning is that it came on the day when most stocks did well after the Federal Reserve all but ensured it would be cutting interest rates in September. Retailers should benefit as consumers get some relief.  

But that relief may take months to be felt. And with AAP stock trading near its 52-week low, it’s fair to ask if this is a buying opportunity.  

Revenue Continues to be Flat 

An encouraging part of the report is that the company recorded a slight beat in revenue. The $2.68 billion the company reported was better than the $2.67 billion that analysts had forecast. The number was also in line with the $2.69 billion reported in the same quarter in 2023 and again in 2022.  

Another highlight of the report was the company’s expected announcement that it was selling Worldpac Inc., a wholesale distribution business, for $1.5 billion. The company plans to use that cash to strengthen its balance sheet and continue investing in its core business.  

That will help since the company’s long-term debt of $1,78 billion as of July 13, 2024, was higher than the $1.76 billion it reported on December 30, 2023. The company’s cash balance was also declining, down to $479.4 million compared to $503.5 million in the same time period.  

The company is also guiding for lower revenue. Part of that is due to its intention to pivot to a more aggressive price-cutting strategy. The company had been attempting to maintain prices (and margins), but the recent results show that strategy to be unsustainable. 

The EV Transition is Slowing 

Most retail stocks are under pressure due to weakening consumers. Auto parts stores like Advanced Auto Parts face an added threat from the growing popularity of electric vehicles (EVs).  

So, is there any hope for investors? Recent studies suggest there is a glimmer of hope.  

The increase in used Tesla Inc. NASDAQ: TSLA electric vehicles is highlighting the fact that approximately 51% of recent EV buyers are choosing to go back to internal combustion engine (ICE) vehicles.  

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The important thing to remember is that this one data point doesn’t change the overall trend. The investment being made in the EV market is giving the sector a “too big to fail” feel. At the same time, there still needs to be a broader charging infrastructure to address the range anxiety that consumers feel. Both statements can be true.  

But it also means that the window that Advanced Auto Parts has won’t be open forever. And with the company struggling to keep pace with competitors such as AutoZone Inc. NYSE: AZO and O’Reilly Automotive Inc. NASDAQ: ORLY, how should investors view AAP stock? 

A Profitable Trade, but Wait-and-See Investment 

Trading near its 52-week low and with a Relative Strength Indicator around 27, some swing traders may want to scratch the itch on AAP stock. And the sell-off may be overdone. Plus, at 13x forward earnings, AAP stock is priced at a discount to both AutoZone (20.6) and O’Reilly Automotive (27.1).  

On the other hand, it’s hard to look at this as a one-off earnings miss. The company has now missed expectations in 7 of the last 8 quarters. Plus, the company’s profit margin was also down YOY to 41.5% from 42.5%. And as the company continues to face higher product costs that they can’t pass along, it’s hard to see that improving.  

And that’s being reflected in the Advanced Auto Parts analyst forecast on MarketBeat. Since the report, four analysts have lowered their price targets on AAP stock. Three of the four new price targets are more than 5% below the current consensus price target of $60.46 with the lowest coming from Truist Financial Corp. NYSE: TFC which gives the stock a $46 price target.