Shares of leading auto parts manufacturer Advance Auto Parts (AAP) have seen double digit percentage price gains over the past year, thanks to the bullish investor sentiment surrounding the industry. But, with surging market volatility amid heightened geopolitical tensions, is AAP an ideal investment bet now? Read on to learn our view.
Advance Auto Parts, Inc. (MONKEY) in Roanoke, Va., is a leading auto market parts provider that operates more than 4,706 stores (as of January 2, 2021) across North America. Its customers include professional installers and do-it-yourself consumers. The company operates through five segments: Northern Division; Southern Division; Carquest Canada; Independents; and Worldpac. AAP has an ISS QualityScore of 3, indicating relatively low governance risk.
Shares of AAP have gained 23.7% in price over the past year and marginally over the past five days to close yesterday’s trading session at $ 201.17.
Here’s what could shape AAP’s performance in the near term:
Better-Than-Expected Quarterly Results
AAP’s net sales increased 1.3% year-over-year to $ 2.40 billion for its fiscal fourth quarter, ending December 31, 2021, surpassing the consensus estimate of $ 2.37 billion. This can be attributed to an 8.2% increase in comparable-store sales. Its adjusted gross profit was $ 1.10 billion, up 12.1% from the same period last year. Its adjusted operating income rose 24.8% from its year-ago value to $ 176.80 million. And its EPS stood at $ 2.07, reflecting a 35.4% improvement from the prior-year quarter. The company beat the Street’s $ 1.97 EPS estimate by 5%.
AAP President and CEO Tom Greco said, “Advance had a strong fourth quarter and delivered a record year in 2021 across all key metrics. We remained focused throughout the year on the execution of the strategy we outlined last April to deliver top quartile total shareholder return. Thanks to the dedication of our team members and Independent partners, our business is substantially stronger and better positioned today than it was prior to the pandemic. ”
Moody’s credit rating agency assigned a Baa2 rating to AAP’s proposed $ 300 million unsecured senior notes offering. This indicates a stable outlook. The company’s impressive credit rating can be attributed to its historically conservative financial strategy, vast market presence, and leading position in the industry. Moody expects the AAP to remain a relatively stable performer over the near term and is expected to outperform pure-play online retailers in this space by leveraging its robust store network.
Consensus Rating and Price Target Reflect Potential Upside
Among 11 Wall Street analysts that rated AAP, seven rated it Buy while four rated it hold. The 12-month median price target of $ 266.27 indicates a 32.4% potential upside from yesterday’s closing price of $ 201.17. The price targets range from a low of $ 240.00 to a high of $ 294.00.
POWR Ratings Reflect Rosy Prospects
AAP has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
AAP has an A grade for Quality. The company’s trailing-12-month gross profit margin of 44.84% is 25.3% higher than the 35.8% industry average, which is in sync with the Quality grade.
Among the 68 stocks in the Auto Parts industry, AAP is ranked # 9.
In addition to the grades I’ve highlighted above, view AAP ratings for Sentiment, Stability, Value, and Growth here.
As 40-year high inflation rates and semiconductor shortages elevate new car prices significantly, the demand for auto parts is expected to remain high. People will likely opt to repair old cars rather than invest in a new one. And as the macroeconomic headwinds persist, the auto parts industry is expected to grow in 2022. Thus, we think that as a leading player in this space, AAP will likely benefit from the favorable trends.
How Does Advance Auto Parts, Inc. (AAP) Stack Up Against its Peers?
While AAP has a B rating in our proprietary rating system, one might want to consider looking at its industry peers, Ituran Location & Control Ltd. (ITRN) and Genuine Parts Company (GPC), which have an A (Strong Buy) rating.
AAP shares were trading at $ 206.53 per share on Wednesday morning, up $ 5.36 (+ 2.66%). Year-to-date, AAP has declined -13.90%, versus a -8.23% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don’ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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