Investors in Advance Auto Parts (NYSE: AAP) just can't seem to catch a break these days. On Thursday, the company reported in-line yet uninspiring results for the fourth quarter as well as 2006 full-year figures. Net revenue for the quarter rose 5.4%, but that was on the back of only a 1.6% growth in comparable same-store-sales growth.
This marks the third straight quarter in which same-stores-sales growth has come in at less than 2%. Ouch. Not surprisingly, net income growth was crimped this quarter -- it met analyst expectations of $0.33 a share, but it was also $0.03 less year over year.
The full-year numbers for 2006 look a little better, but not by much. Revenues for the full year grew 8.5%, but same-stores-sales growth came in at only 2.1%, versus 8.7% in 2005. Net income dropped a little more than 1% but was offset by share buybacks that reduced the number of shares outstanding by 2.6%. Earning $2.16 per share in 2006, the company is forecasting growth of 10% to 15% in 2007. Unfortunately, management also anticipates continued same-store growth rates in the low single digits.
But hey, it isn't all so bad ...
Management plans to address the problem of stagnant sales by focusing more on existing stores and reducing the number of store openings, remodelings, and relocations in 2007. Shareholders should take solace in knowing that this management team at least recognizes that you can't grow your way out of every problem. In addition, while profits have been squeezed by the decelerating sales growth, margins are still at healthy levels. While the return on equity has been inching downward for some time now, it still came in at a healthy 22.4% figure for 2006. Similarly, return on assets is at a not-too-shabby 9.4%.
Strategic alternatives
Advance's stagnant share price and earnings, along with its proven ability to provide strong returns on invested capital, have caused some to consider it a possible target of one of the plethora of big-dog leveraged-buyout funds looking to invest their billions. Is Advance likely to be such a target?
While I wouldn't go so far as to say that I expect the company to be in play, I have no doubt that some buyout firms are already giving Advance serious consideration. With an enterprise value of roughly $4.6 billion, it is certainly in the price range of numerous buyout funds.
In addition to the company's qualities that I highlighted above, savvy buyout shops will also note the company's dispersed ownership and the potential to squeeze additional profit from operations.
Last, yet perhaps most important, the firm's sizable cash flows could withstand piling on a great deal more debt, thus lowering a fund's entry price and enhancing returns. Don't get too excited, though; the potential for a buyout is likely already baked into the share price.
Foolish editor Joe Magyer does not own shares in the only stock mentioned in this article. This is actually Joe's first article on The Motley Fool. He just hopes it didn't stink. Oh, and you can read all about the Fool's disclosure policy, well, right back there.
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