Advance Auto Parts (NYSE:AAP) Growth Accelerates, Shares Fall

A Buying Op In Advanced Auto Parts

 It’s been a full quarter since I last reviewed Advanced Auto Parts (NYSE:AAP) and the situation is only more attractive. At the time, I saw the stock on the verge of a breakout and urged investors to wait for a pullback before buying. While the fundamental picture was brightening, the technical picture had a Dark Cloud hanging over it that I am glad I heeded. Since then the stock has offered not one but two buying opportunities and now a third one is at hand.

Quoting myself from August 18th, 2020

 “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.”

Advance Auto Parts Beats On The Top And Bottom Line

Advance Auto parts reported a great quarter. Not only is the company growing on a YOY basis but growth is accelerating. The company reported $2.54 billion in 3rd quarter revenue which is down sequentially but up 10.0% on a YOY basis. This compares with a 7.3% increase in YOY sales in the 2nd quarter and beats the consensus by 2.4%. Strength was noted across all segments with particular strength in the DIY omnichannel offerings, no surprise there. On a comp level, same-store sales came in at +10.2% and beat by more than 300 basis points.

Moving down the report the news just keeps getting better. The company was able to leverage the volume increase and capitalize on operating improvements/cost controls to improve margins at the gross and operating levels. At the operating level, margin improved 183 basis points to 10.7% and was aided by a 133 basis point decline in SG&A expenses.

The GAAP earnings present the only negative news in the report but even that is mitigated. The GAAP earnings came in at $2.13 and missed consensus by $0.60 due to costs associated with fall promotions. Among them is the Return of Diehard, a brand relaunch that should do well to aid sales and expand brand awareness for both the Advanced Auto Parts and Carquest segments of the business. The adjusted earnings help offset the miss rising 35% on a YOY basis to beat the consensus by $0.14. No guidance was given but we can assume the revenue gains are at least stick. If there is another stimulus package there may be another surge in growth.

Advance Auto Parts Is Giving Value To Shareholders

 Advance Auto Parts announced its next dividend distribution along with the 3Q report and it is in line with the last. The $0.20 quarterly yield works out to about 0.65% on an annual basis which is not a lot I know. What you get along with the yield is a large amount of relative safety. The payout ratio is very low at 12% of earnings, the company is sitting on $16 per share in cash, and its already good balance sheet is looking better and better. Over the last quarter, the company paid down $300 million in debt and refinanced another $250-odd million lowering both total debt and leverage. And the company is buying back shares, about 0.7 million over the quarter, worth  $110 million with just over $750 million still available under the repurchase authorization.

 The Technical Outlook: Is This Another Entry I See

Shares of AAP fell on the 3Q news but not far. The early morning drop resulted in a small gap at the open but buyers stepped in and drove the stock back up. What this looks like to me is the third buying opportunity since the last earnings report and one at a higher level than before. The indicators are mixed but consistent with a rising market, so I am optimistic we’ll see price action rise. Momentum, at least, is bullish and points to higher prices in the near-term. The $160 level may keep price action from rising far, however, but if it doesn’t the next targets are $170 and $180.