Time To Hit The Brakes With Advance Auto Parts ?

Advance Auto Parts: High Expectations Sour Great Results

Shares of Advance Auto Parts (NYSE:AAP) are holding steady in the premarket after missing Q4 earnings estimates but it may be time to put on the brakes. The company reported a great quarter and gave a solid outlook for next year but there is a problem. The results and guidance, as good as they are, aren’t anything more than the consensus was predicting and the market was expecting more. Going on the assumption the forward earnings outlook drives current prices the outlook is already priced into this stock.

Advance Auto Parts Reports Mixed Quarter, Guides Positive

Advanced Auto Parts reported a good quarter but one marred by the fact it was nothing more than expected. The top-line $2.37 billion in revenue is up 12.3% from last year and only beat the consensus by 40 basis points where the average S&P 500 company is beating by more than 1000. At the comp level, a 4.7% increase in comp sales was boosted by omnichannel and professional with strength in all three accelerating in the first month of 2021. Results were also aided by the successful launch (relaunch) of the DieHard battery brand and an expansion of Carquest.

Moving down to the earnings portions of the report, the company’s gross and operating margins both improved from last year. The adjusted gross margin expanded 190 basis points while operating and adjusted operating margins widened a much larger 2000 and 1460 basis points. Margins were impacted by higher pricing for products, inventory management including shrinkage, and supply chain leverage that is expected to persist in 2021. On the bottom line, both the GAAP and adjusted EPS grew on a YOY basis but missed the consensus target. The adjusted $1.87 missed by $0.11. As for the year, Autozone produced record revenue and earnings.

"Through the first four weeks of 2021, we are growing comparable-store sales low double digits with strength across both DIY omnichannel and Professional. We are also encouraged by improving trends in the Northeast and Mid Atlantic Regions, which are still lagging the country, but closing the gap. In addition, we remain laser-focused on the execution of our long-term plan to drive growth at or above industry growth rates, deliver meaningful margin expansion, and return excess cash to shareholders,” said Tom Greco, CEO, and president.

Advance Auto Parts Explosive Dividend Growth Is A Factor To Be Considered

Advance Auto Parts is paying out profits to shareholders in the form of both buybacks and dividends. The buybacks totaled about $320 million over the past quarter, the dividend about 0.65% in yield, but there are two things to consider. This company has a rock-solid balance sheet with ample cash, low debt, low leverage, ample coverage, and growing FCF which means it can sustain or increase the buybacks and continue raising the dividend at the same time.

Sustaining buybacks and rising the dividend doesn’t sound like much until you add in the fact the payout ratio is a mere 11% of consensus earnings and the last distribution increase was over 300%. At current levels and earnings, this company could easily sustain another triple-digit increase in payment. Advance Auto Parts doesn’t have a long history of increases and the company opted not to increase at the end of the 4th quarter so there is a risk another increase won’t come. Either way, the 0.65% yield is safe and sound.

The Technical Outlook: Advance Auto Parts Is Range-Bound

Shares of Advance Auto Parts have been stuck in a range since hitting the 2020 high near $170. At this level, the stock is trading about 16X its forward earnings consensus which makes it a bit of a bargain relative to the broad market. The stock may break out of this range later in the year but it looks like the range will dominate price action over the next few weeks at least. If price action is not able to hold the bottom of the range near $142.50 a move to $130 or lower may be on the way. Longer-term we expect to see this stock retesting highs near $180.

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