Advance Auto Parts Is A Dividend Aristocrat In the Making

Advance Auto Parts Exceeds Expectations For Growth 

Advance Auto Parts NYSE: AAP isn’t a high-yielding stock or even that close to becoming a Dividend Aristocrat but there is a story here we think dividend-growth investors will be interested in. The company has been working hard over the past few years to improve its balance sheet and the balance sheet is now a fortress. The Q3 earnings report includes a 23% increase in FCF that we see helping to fuel years of future dividend increases. As it stands, the company is paying about 1.65% in yield with a low 35% payout ratio and a 2-year history of distribution increase at a 60% CAGR. While we don’t expect to see such robust increases in the future we do expect to see this company continue paying and to keep increasing the dividend long into the future.

"Several years of focus on our balance sheet resulted in Free cash flow improvement of 19% to $734.0 million compared with $616.6 million year-to-date in 2020. Free cash flow was up 36% when compared to 2019. As a result, and in line with our commitment of returning excess cash to our shareholders, we returned $291.2 million in Q3 and $952.6 million through the first three quarters of 2021 through a combination of share repurchases and our quarterly cash dividend,” says CEO Tom Greco. 

Advance Auto Parts Pulls Back Into A Buying Opportunity 

Advance Auto Parts reported a fantastic quarter and yet shares are down in the wake of the news. The company reported $2.6 billion in consolidated revenue which is good for a gain of 3.1% over last year’s strong results and 13.3% over 2019. Revenue also beat the Marketbeat.com consensus estimate by 77 basis points but there is something to consider, the margin of error is a bit slim and due as much to price increases as anything else. On a comp basis, sales are also up 3.1%.

Moving down to the margin, the company was able to improve margin by 72 basis points GAAP and a 246 improvement at the adjusted level that carried through to the bottom line. On the bottom line, the GAAP EPS of $2.68 missed consensus by $0.17 but is up 26% from last year while the adjusted $3.21 is up 22% and beat by $0.36. 

Looking forward, the company is expecting the strength to continue and is raising guidance for both the revenue and earnings. Advance Auto Parts is now expecting full-year revenue in a range of $10.9 to $10.11 billion versus the previous high-end of $10.8 billion. That should come with comp sales of 9.5% or greater versus the prior high-end of 8% and margins above their previously expected range as well. 

The Analysts Are Driving Advance Auto Parts 

The analyst’s consensus sentiment is a weak Buy and that hasn’t changed much over the past several months but the Marketbeat.com consensus price target has. The consensus target is up 5% in the last 30 days and 18% in the last 3 months and it is going to go higher. There’ve been only three analyst shout-outs since the Q3 report but all 3 include a price-target hike that has the stock trading near $275 compared to the current $236 consensus estimate.

The Technical Outlook: Advance Auto Parts Pulls Back To Support 

Shares of Advance Auto Parts are down more than 3.5% following the earnings release but don’t read too much into the move. Price action is down but still above key support at the $230 level and the short-term moving average. We expect to see support kick in very soon if not at or above the EMA with the thought a consolidation may follow. Assuming price action is able to hold current levels we see this market moving up to set new all-time highs by early 2022 if not before the end of 2021.