Advance Auto Parts (NYSE:AAP) Breaking Out On Earnings

If You Are Surprised By Advance Auto Parts You Aren’t Paying Attention

The overwhelming theme of the 2nd quarter earnings cycle is that results are better than expected, the consensus outlook for the year is too low, and stocks are undervalued. The right socks anyways. Stocks that are positioned to benefit from secular trends, new trends sparked by the pandemic, and the awesomely powerful economic rebound that is now underway. Advance Auto Parts (NYSE:AAP) is one such company.

Advance Auto Parts, one of the nations leading after-market car part retailers, just reported earnings and blew past the consensus. If you are surprised by this let me, and as respectfully as I can, that you weren’t really paying attention. It was only last week that Autozone (NYSE:AZO) reported similar strength and two weeks ago that O’Reilly Auto Parts did the same. Based on the economic outlook, America’s love of cars, and the strength of DIY projects there is no reason to think Advance Auto Parts and its competitors won’t keep delivering in the 2nd half of 2020.

• Data from Bank of America shows spending at auto parts stores rose 24% on an average daily, aggregated basis for the week ending August 8, 2020.

Advance Auto Parts Beats Consensus And Shares Move Higher

Advance Auto Parts absolutely smashed the consensus, just like a number of other retailers uniquely positioned for the post-pandemic world. On the top line, revenue came in at $2.5 billion. That is up 7.3% from the previous year and more than 550 basis points better than the consensus. GAAP EPS of $2.74 also beat but it’s the adjusted EPS that really stands out. On the bottom line, adjusted EPS came in at $2.92 and $0.95 above the analyst’s best guesses.

At the comp-level, U.S. comps rose 7.0% and more than double the 2.6% consensus. Notably, the company blames much of the success on two trends that are dominating the market today; Do-it-yourselfers and omnichannel (read eCommerce) channels. The mix helped drive margin improvement as well, an increase worth 60 basis points in terms of Gross and nearly 300 basis points at the operating level.

“Without question, we benefited from a surge in industry demand in the quarter fueled by the government stimulus, unemployment benefits, and the impact COVID-19 had on consumer behavior in terms of how they repaired and maintained their vehicles.”

Looking forward, the company did not issue any formal guidance but it did offer some positive commentary. According to trends seen in the first five weeks of the quarter, business is accelerating.

“Through the first five weeks of the third quarter, the Company continues to see strong growth in DIY Omnichannel and positive comparable store sales in Professional. While uncertainties remain around the continued impact of COVID-19 during the balance of the year, the Company believes it is well-positioned to meet the demands of the business.”

Advance Auto Parts Has What No Other Car Parts Dealer Does, A Dividend

Unlike its competitors, Autozone and O’Reilly Auto Parts, Advance Auto parts pays a dividend. The only catch is the yield, less than 1.0% at today’s share prices, but there are some mitigating factors. Aside from the company’s outlook for growth, the balance sheet is in phenomenal shape. There is some debt, used to leverage growth, but the company is well-capitalized and obligations are well-covered. In fact, over the past quarter, free-cash-flow increased by 60%.

IIn terms of dividend history and growth, the company has been paying a steady distribution for 15 years with no interruption. Considering the payout ratio is below 15% and the single distribution increase on record, an increase that occurred earlier this year, there is a chance for another substantial increase in the not-too-distant future.

The Technical Outlook: The Analysts Are Upping Their Targets

Needless to say, the analysts are already upping their targets for this year. The first to do so is CFRA Research analyst Garret Nelson. According to Nelson, Advance Auto Parts stands out as the top-choice among auto parts retailers because of its partnership with Walmart. He raised his price target to $195, 21X the company’s 2020 earnings, or an upside of 18%.

"We remain bullish on AAP and auto aftermarket retailers in general, particularly given its partnership with Walmart and the highly-anticipated rollout of the Walmart+ subscription service, which we think will accelerate AAP's online sales and drive stronger same-store sales growth rates in the coming quarters,"

Looking at the chart, the trend is up but price action may have hit a peak. Today’s news sparked a pre-market rally that had shares up more than 5% at the open. Since then, resistance at the November 2019 high has shares moving lower. The candle is long and black but, let me remind you, has little meaning until the session closes. If the candle remains as it is at the close of the session I would expect to see a consolidation at current levels or a pullback to support. The best targets for support are near $150 and $160 but I don’t think the price will fall that far. If not then a break to new highs would be a trigger to buy.