It's been a tough past year and a half for Advance Auto Parts (AAP 0.58%). But it's been even tougher for its shareholders. The stock is down 70% from its early 2022 high, and lower by 37% just since the end of May. A combination of broken supply chains, inflation, and broad economic malaise is taking a measurable toll on the company's results. The first quarter's revenue growth of 1.3% is outright anemic, and same-store sales actually slipped a bit for the three-month stretch. Full-year sales and earnings guidance was lowered too, with the latter being nearly cut in half.
As the old adage goes, though, it's darkest before dawn. Advance Auto Parts is arguably at the "can't get any worse" stage of this highly problematic cycle. You can step into the stock at what's apt to be close to the bottom.
The pandemic-prompted cyclical headwind is nearing its end
The auto parts business is a perennial winner. Most people just need their cars to work, and given the ever-growing cost of buying a new one, it makes good financial sense to keep older ones in good working order for as long as possible. Advance Auto Parts has been no exception to the market's consistent growth cadence.
The COVID-19 pandemic and its subsequent fallout, however, really did a delayed number on this company. As CEO Tom Greco explained of the company's lackluster Q1 results, "unfavorable product mix" and "higher than planned investments to narrow competitive price gaps" are crimping overall profits, echoing a comment made in the company's Q4 2022 report.
Dialing back Advance Auto Parts' 2023 revenue growth outlook from a range of 1% to 3% to a new range calling for a decline of as much as 1% suggests there's no meaningful relief on the horizon. The recent dividend cut says the same.
Nothing lasts forever, though. Indeed, better days may be in store for the auto parts retailer and its stock sooner than most everyone expects.
One of the forces currently working in Advance Auto Parts' favor is the sky-high price of new cars. While now down a bit from the record high of $49,507 hit in December of last year, Cox Automotive's estimated average sales price of $48,658 for vehicles sold in May is still jaw-droppingly high, leaving them out of reach for many would-be buyers.
To this end, S&P Global Mobility reckons that, as of May, the average age of cars still being driven on U.S. roads stands at a record-breaking 12.5 years. But, even a 12-and-a-half-year-old car that's in reasonably good condition is going to need repairs sooner or later, and likely need them sooner than later.
At the same time, although they're still relatively expensive and auto parts stores still have fewer in stock than they did prior to the pandemic, wholesale costs for car parts are leveling off at the same time their availability is improving. It's a start. Note that sales of these goods remain in a broad, industrywide uptrend even if Advance Auto Parts bumped into a bit of a headwind a quarter earlier.
Data source: U.S. Census Bureau and Bureau of Labor Statistics.
Also bear in mind that at least some of the company's self-imposed, profit-sapping efforts are winding down. As Greco also explained in the company's fourth-quarter report, "After several years of significant investments in complex transformation initiatives and the majority of the integration behind us, we're now able to focus more time and resources on leveraging our differentiated asset base and improving execution."
Look where Advance Auto Parts is going, not where it's been
This year's going to be another tough one to be sure. The auto parts retailer says earnings will likely roll in between $6 and $6.50 per share versus last year's $8.32; profits will slump considerably more than sales will. Last year's free cash flow of more than $700 million could fall all the way back to as low as $200 million, according to the company's guidance. Yikes.
But all of this trouble may already be priced into the stock ... and then some.
What's not priced in is the fact that the new-and-improved Advance Auto Parts could be fully up and running right around the same time supply chains are finally, fully fixed and costs are finally starting to ease. That probably won't matter in earnest until next year. Analysts expect this year's projected per-share profit of $5.91 to start growing again in 2024, en route to full-year earnings of $6.78 per share.
Given that stocks tend to reflect their plausible future rather than their present, however, now's the time to take a swing on Advance Auto Parts. That's especially true while the stock is priced less than 10 times next year's expected profits. That's pretty cheap.
Just bear in mind there's still plenty of volatility in the cards.
