Advance Auto Parts Is About To Advance In Value

Another Good Quarter For Advance Auto Parts

Advance Auto Parts NYSE: AAP gave the market almost everything it could want with the Q2 earnings report, including a buying opportunity. Price action fell in pre-market trading but buyers were ready to scoop up the bargains and have sent driven share prices back above the short-term moving average. While the near-term outlook may be a little uncertain, the longer-term outlook is very bullish. In our view, the stock is consolidating and getting ready to break out to new highs. If that scenario unfolds, we see this stock moving up to the $230 level if not higher.

This Is What’s Wrong With Advance Auto Parts Q2 report

Advance Auto Parts had a great second quarter and delivered a good report that is marred by expectations and not performance. While the $2.65 billion in revenue is up 6% from last year it is only in line with the consensus estimates which counts as a miss for us today. Considering strength in tangental markets such as consumer goods and used cars we would expect to see a little more revenue strength. 

Also of concern is the fact that comp sales came in a little bit less than expected at 5.8%. The analysts were expecting closer t0 6.0% but the difference was made up by pricing and store openings. Advance Auto Parts open new stores over the past year and is planning to open about 100 more new stores before the end of this fiscal year. On a two-year basis, sales are up a little more than 13%.

Moving down the report, the company was able to improve the adjusted operating margin by 11 basis points which is not much but significant in today's environment. The problem is that GAAP margins contracted more than 100 basis points and left earnings a little shy of consensus. On a GAAP basis, the $2.74 reported by the company missed the mark by $0.33 but was offset by the adjusted earnings. Adjusted earnings came in at $3.40 to beat the consensus by a full $0.35.

While the lackluster details within the report dragged on share prices in early trading, it is the guidance that got them moving higher later in the day. The company raised its guidance for revenue, comp sales, and earnings for the year and all to ranges above the previous guidance but even so, it wasn't much more than what the market was expecting. The previously expected revenue of $10.40 to $10.60 billion compares to the new guidance of $10.60 to $10.80 and the consensus estimate of $10.70 billion.

Advance Auto Parts Is A Free-Cash-Flow Machine

Among the many appeals of Advance Auto Parts is its ability to generate free cash flow. The company’s operating cash flow improved to $777 million on a YTD basis with 83% of that counted as free cash flow. This is important because Advance Auto Parts is also a capital returning stock that regularly shows up in Marketbeat’s dividend screener. The dividend is yielding about 1.9% at current price levels and comes with a high expectation of being increased in the future. Of interest to dividend growth investors is the low 36% payout ratio and the 50% CAGR. We don't expect the 50% distribution CAGR to persist but we do expect to see healthy dividend increases long into the future.

The Technical Outlook: Advance Auto Parts Is Consolidating For A Move Higher

Price action in Advance Auto Parts was a little weak in the early hours but the buyers quickly stepped in. Support appears to be confirming above $205 but there is still some resistance that needs to be overcome. Resistance above the short-term moving average may keep prices in check for the near term but we would expect to see it eventually worn down and surpassed. If the market can set a new high above $215 we would expect to see this stock move up to the $230 level at least.