Does This Parts Retailer Deserve a Place in Your Portfolio?

Uncertain economic conditions have forced consumers to defer purchases of new cars and stick to older ones. While new car sales have dropped as a result, aftermarket retailers such as Advance Auto Parts (NYSE: AAP) have benefited from the uncertainty. In its most recent quarter, Advance posted a 12% increase in profits, facilitated by growth in its commercial sales division. Let's see whether Advance merits a place in our portfolios.

The road ahead
In the past 12 months, Advance has added nearly 130 stores, taking its total store count up to 3,627. These new stores have added to overall revenues. Plus, in an effort to push up profits, the company has initiated steps to revamp its cost structure that include reducing non-production costs, lowering incentive compensation, and enforcing a more customer-centric labor model. It has also been looking to spend on and expand its commercial and e-commerce businesses. I think these initiatives should pay off in the long run and help Advance boost both its top and bottom line.

Helped by the adverse economic conditions, in the past 12 months, Advance's revenues have increased to $6.05 billion from $5.65 billion, up nearly 7%. At the same time, the company has managed to improve its operational efficiency -- its operating margin surged to 10% from 9.2% a year ago.

Is the price right?
Let's take a look at how the company is valued when compared with its industry peers.

Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful, LTM = last 12 months, NTM = next 12 months.

The enterprise multiple, TEV/EBITDA, or total enterprise value to earnings before interest, taxes, depreciation, and amortization, is another way of judging how expensive a stock is. A very low figure means a company is undervalued. Looking at both the P/Es and enterprise multiple, we see that Advance's valuation falls more or less in line with that of its peers. In fact, it's slightly at the cheaper end. However, Advance is making strides in the right direction to improve both its revenues and earnings in the long haul. Considering all of this, I think the company may be worth watching. What say you, Fools?

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