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S&P 500   3,933.92
DOW   33,597.92
QQQ   280.53
How To Be Persuasive With Your Body Language
Want To Catch The Next Hot Investing Trend (Look Inside?) (Ad)
How to Play Apple and Amazon Heading in 2023
Low Beta, High Yield Campbell Soup Company Is Mmm Mmm Good
Want To Catch The Next Hot Investing Trend (Look Inside?) (Ad)
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Microsoft strikes 10-year deal with Nintendo on Call of Duty
Want To Catch The Next Hot Investing Trend (Look Inside?) (Ad)
Could trawler cams help save world's dwindling fish stocks?
Southwest Airlines brings back dividend as travel rebounds
S&P 500   3,933.92
DOW   33,597.92
QQQ   280.53
How To Be Persuasive With Your Body Language
Want To Catch The Next Hot Investing Trend (Look Inside?) (Ad)
How to Play Apple and Amazon Heading in 2023
Low Beta, High Yield Campbell Soup Company Is Mmm Mmm Good
Want To Catch The Next Hot Investing Trend (Look Inside?) (Ad)
Ulta Issues A Beautiful FY Outlook, But Is the Stock A Buy Now?
Microsoft strikes 10-year deal with Nintendo on Call of Duty
Want To Catch The Next Hot Investing Trend (Look Inside?) (Ad)
Could trawler cams help save world's dwindling fish stocks?
Southwest Airlines brings back dividend as travel rebounds
S&P 500   3,933.92
DOW   33,597.92
QQQ   280.53
How To Be Persuasive With Your Body Language
Want To Catch The Next Hot Investing Trend (Look Inside?) (Ad)
How to Play Apple and Amazon Heading in 2023
Low Beta, High Yield Campbell Soup Company Is Mmm Mmm Good
Want To Catch The Next Hot Investing Trend (Look Inside?) (Ad)
Ulta Issues A Beautiful FY Outlook, But Is the Stock A Buy Now?
Microsoft strikes 10-year deal with Nintendo on Call of Duty
Want To Catch The Next Hot Investing Trend (Look Inside?) (Ad)
Could trawler cams help save world's dwindling fish stocks?
Southwest Airlines brings back dividend as travel rebounds

Is Advance Auto Parts a Buy After its Earnings Crash?

Key Points

  • Advanced Auto Parts is down over 15% after delivering poor results on its bottom line. 
  • Analysts have been quick to downgrade AAP stock on concerns about demand in a weakening economy.  
  • The company is making investments in its supply chain to ensure that this quarter is an outlier to what has been a bullish story. 
  • Investors should wait for more clarity before taking a position in AAP stock.  

     

Is Advance Auto Parts a Buy After its Earnings Crash?

Advance Auto Parts (NYSE:AAP) is down more than 15% after missing badly on the bottom line in its third-quarter earnings report. The company’s revenue of $2.64 billion came in roughly in-line with expectations. But on the bottom line, analysts were expecting $3.40 of earnings per share (EPS). The company, however, delivered just $2.84 EPS.  

Furthermore, the company lowered its outlook for the full year. The company is now guiding for EPS in a range of $12.60 to $12.80 down from its prior guidance for $12.75 to $13.25.  

Analysts reacted swiftly with over a half-dozen analysts either lowering their rating, lowering their price target or both. The question that investors must ask is whether the sell-off is overdone? Advance Auto Parts did have that misfortune of reporting on the same day when Target (NYSE:TGT) delivered a poor earnings report with a dismal outlook for the holiday season. 

A One-Off or the Reversal of a Bullish Trend? 

In 2021, Advance Auto Parts announced three goals: growing sales, expanding margins, and returning money to shareholders. Prior to this earnings report, the company was doing just that, and quite successfully.  

The inflated cost of new and used cars was a tailwind for auto parts stores in 2021. Consumers were looking to keep their existing car in good working order just a little longer. One concern heading into 2022 was if these companies could keep that momentum going. However, in 2022, Advanced Auto Parts has kept its revenue consistent on a year-over-year (YOY) basis.  


That trend continued in this quarter. What didn’t continue to grow was the company’s margins. They contracted for the first time in nine quarters. Inflation, in this case, was a double-edged sword that hurt the company’s margins.  

Tom Greco president and CEO, said the company is taking steps to ensure it has the right inventory in place. A key initiative that the company is taking is to increase the inventory of its house brands which have lower costs for the consumer and higher margins for the company.  

However, this investment came as a hit to the company’s free cash flow (FCF) projections. Advance Auto Parts now expects to achieve $300 million in FCF down from prior estimates of $700 million.  

More Customers or More Sales Per Customer? 

This is the question that investors will need to reconcile as it relates to an investment in AAP stock. In lowering their outlook for AAP stock analysts expressed concerns that the company’s decline in earnings was evidence that it was losing customers.  

That would take the company into a bearish spiral as new customers may be hard to find in a recession. On the other hand, Greco says the issue is not so much about new customers as generating more sales per customer. In an interview with CNBC, Greco argued that the company’s customer base, which consists of professionals as well as do-it-yourselfers, has never been particularly loyal to one auto parts store. 

Greco’s belief is that their investment in ensuring the company has the right products, at the right locations, at the right times will pay off.  

 Should You Buy AAP Stock on the Dip? 

Before the earnings report, AAP stock was trading in a range between its 50- and 200-day moving average with the 200-day SMA providing firm resistance. It’s sliced well below the 50-day SMA now. But strictly from a technical standpoint, AAP stock looks oversold right now.  

However, I’m writing this less than 24 hours after the company’s earnings report. For certain, the consensus price target of $235 put forth by the analysts surveyed by MarketBeat is going to come down. And that will be when investors can figure out how high the ceiling will be for AAP stock. 

In the meantime, if you were (or still are) a shareholder, the company will pay its current dividend of $1.50 per share. The company has been increasing this dividend at impressive levels since 2020. You shouldn’t expect that level of growth to continue. But with an annual dividend of $6.00 per share, it could be worthwhile for income investors to hang on to their shares. 

Should you invest $1,000 in Advance Auto Parts right now?

Before you consider Advance Auto Parts, you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Advance Auto Parts wasn't on the list.

While Advance Auto Parts currently has a "Hold" rating among analysts, top-rated analysts believe these five stocks are better buys.

View The Five Stocks Here

Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Advance Auto Parts (AAP)
3.0578 of 5 stars
$146.65+0.8%4.09%18.85Hold$193.67
Target (TGT)
3.0783 of 5 stars
$153.76-0.8%2.81%21.06Moderate Buy$185.25
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Chris Markoch

About Chris Markoch

Contributing Author: Retirement, Individual Investing

Chris Markoch is a freelance financial copywriter with over five years of experience covering various aspects of the financial markets. You may find his writing a little different than other stock articles you’ve read. And that’s OK with him. Chris doesn’t have a traditional finance background. What he does bring to the table is a strong business and marketing background having worked for agencies that serviced Fortune 500 companies. With that in mind, he isn’t overly impressed with what companies say, and more focused on what they do. And because buyer behavior dictates so much of what happens with a stock, Chris always keeps the end consumer close in mind. Chris has been writing for MarketBeat since 2018.

Contact Chris Markoch via email at CTMarkoch@msn.com.