Will Advanced Auto Parts Stock Get a Jump Start From Earnings

Advanced Auto Parts (NYSE:AAP) will deliver its quarterly earnings on February 18. The company is projected to post earnings per share (EPS) of $1.36 on revenue of $2.12 billion. Although AAP stock is down for the year, it is now bouncing up off a level of support. If the company posts a good earnings report, the stock should have some technical momentum in the near term. If that happens, investors should be watching to see if the stock can push past a resistance level around $150.

Advanced Auto Parts acquired the DieHard brand from Sears in December 2019. This will not provide much, if any, benefit to revenue for the quarter just ended. However, analysts will be looking for the company’s forward projections.

And don’t forget that, unlike its competitors, AAP stock offers a dividend. Now, among dividend stocks, Advanced Auto Parts does not offer an exceptional dividend by any means. And the company does not have a history of raising its dividend. However, for investors looking for total return, AAP stock presents a nice guarantee regardless of the direction the stock price moves in.

Analysts are trending bearish on AAP stock

Wells Fargo (NYSE:WFC) recently lowered its price target from $165 to $140. That would represent a little over a 5% upside from the stock’s price as of this writing. Morgan Stanley (NYSE:MS) and JPMorgan Chase (NYSE:JPM) among a group of other analysts that have lowered their price target for the stock. However, both of those firms were starting from a much higher price target. Among analysts who had AAP stock around the $160 level, the price movement has not been that extreme. In fact, the consensus price target for the stock is $164.47 which would be a gain of just over 23% from current levels.

AAP faces additional headwinds

Whenever analysts start changing their outlook on a stock, investors need to do their homework. In the case of Advanced Auto Parts, there are a couple of areas of concern.

One of the headwinds for AAP stock is competition. Advanced Auto Parts faces it in two ways. First, the company faces direct competition from brick-and-mortar chains such as O’Reilly Auto Parts (NASDAQ:ORLY) and AutoZone (NYSE:AZO). But they also face pressure on their “commodity” products (i.e. motor oil, windshield wipers, etc.) from superstores like Walmart (NYSE:WMT) and even the discount stores like Dollar General (NYSE:DG).

A more acute pressure on the stock comes from an investigation. Some shareholders are claiming that a select group of the company’s officers and directors engaged in delivering false and/or misleading statements to the Securities & Exchange Commission (SEC). Essentially, the plaintiffs are claiming the officers and directors in question were giving overly optimistic projections of AAP stock’s near-term outlook in 2016 and 2017. A federal judge has already ruled that some of the company’s projections “lacked a reasonable basis” based on internal AAP forecasts that predicted negative growth during those periods. This in fact turned out to be the case as the stock dropped nearly 35% in that two-year period.

Advanced Auto Parts may be the best of a bad bunch

The auto parts sector is a niche part of the broader retail market. And unfortunately, it’s been a lagging sector even at a time when the retail sector itself is showing some weakness.

So far in 2020, the sector is down over 8%. From a short-term standpoint, there are a couple of reasons for the poor performance. Warmer weather and higher material costs as a result of the U.S. trade dispute with China are among them. Also, the sector is having a larger online presence, this is particularly true for business-to-business customers who know what they are looking for.

But the sector also faces a broader challenge and an opportunity. Unlike other areas of retail, the auto parts sector does not neatly fit the omnichannel model from a business-to-consumer model.  When customers want to work on their automobiles, they often need to visit the store to make sure they’re getting the right part. And even if they know exactly what they want, they typically are looking to do the work at that time. So one-day or even one-hour delivery is not as meaningful to them.

One bit of good news for the sector is that, according to Global Market Insights, the global automotive aftermarket industry may top $1.4 trillion in five years. That’s up from $1 trillion in 2018.

Electric cars are a distant threat

Some investors are down on AAP stock due to the rise of electric cars. But the move towards electrification is more of a canary in a coal mine than a clear and present danger.

When investors see shares of a company like Tesla (NASDAQ:TSLA) go through the roof, it’s easy to presume the industry is more mature than what it is. And there is no question the industry is moving towards an electric future. However, the infrastructure to support a coast-to-coast paradigm shift is years if not a decade or more from being realized.

And with the growth of ride-hailing services coupled with the trend towards flexible work-from-home models, consumers are keeping their cars longer or choosing to do without a car altogether. The former is a positive trend for Advanced Auto Parts.