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Look to Advance Auto Parts for Stable, Solid Growth

March 06, 2012 | About:
Advance Auto Parts (NYSE:AAP) is a prime example of a company that is growing at a healthy rate. Its stock is in a well established upward trend that has taken it from around $60 per share a year ago to its current 52 week high level of around $87.50 per share. In addition to this capital appreciation, the company also pays out a dividend of $.24 per share on an annual basis which amounts to a dividend yield of .3% at the stock's current price. This dividend is paid out on a consistent basis but has never been raised since the company first started payment in 2006. The payout ratio on the dividend is 5%, and in all probability will not be raised in the near term as the industry average is only 2%.

The company's two closest competitors in the industry are AutoZone Inc. (NYSE:AZO) and O'Reilly Automotive Inc. (NASDAQ:ORLY). AutoZone Inc. presently has a five year expected PEG ratio of 1.15 along with a five year earnings growth forecast of 14.2%. O'Reilly Automotive Inc. presently has a five year expected PEG ratio of 1.13 with a five year earnings growth forecast of 17%. Advance Auto Parts, on the other hand, currently has a five year expected PEG ratio of only .96 along with a five year earnings growth forecast of 16.2%. In my opinion and in terms of the company's future growth Advance Auto Parts is much cheaper even with its recent stock price rise, by comparison.

Advance Auto Parts just celebrated its tenth anniversary (December 2011) as a publicly traded company and over that ten year time period the company has been a case study, in my opinion, on how a business should undertake growth. Since the company's first major expansion in 1998 when it purchased Western Auto, an auto parts and general store retailer, the company has grown to be the second-largest retailer of automotive replacement parts and accessories in the United States. In 2001, Advance Auto Parts acquired Carport Auto Parts in addition to Discount Auto Parts Inc. and became a publicly traded company. The company had 2,484 stores in 38 states at the end of the year. In 2005, the company acquired Autopart International, Inc. which opened the company up to foreign auto parts and added 202 stores to the company's holdings. Today Advance Auto Parts owns over 3,500 retail outlets in 40 states, Puerto Rico and the Virgin Islands. The company operates under the brand names Advance Auto Parts, Autopart International, Advance Discount Auto Parts and Western Auto. Advancedate's Information Technology is the company's information technology network and has played a large part in the company's growth and goodwill. As a do it yourself mechanic myself, knowing a store has the part or can easily get it creates repeat customers. Advancedate's Information Technology has been named to the Information Week's top 500 business information technology rankings every year since 2003.

The company basically breaks down into two segments: its domestic auto parts and its foreign auto parts-- under the Autopart International brand. The domestic segment operates in the Northeastern, Southeastern and Midwestern regions of the United States, Puerto Rico and the Virgin Islands and Autopart International mostly serves the commercial markets in the Northeastern and Mid-Atlantic regions of the United States and Florida. The company's domestic auto parts operate over 3,400 retail stores, mainly under the name Advance Auto Parts, except for stores in Florida which operate under the Advance Discount Auto Parts trade name. This segment also provides customers with online shopping at www.AdvanceAutoParts.com. The Autopart International segment currently has over 200 stores located throughout the Northeastern and Mid-Atlantic regions of the United States and Florida.

In the United States there is currently an increase in the age of the average vehicle, the number of vehicles, the number of licensed drivers and the number of light trucks. These increases have logically increased the number of parts needed to maintain and repair these older vehicles. I think this trend will continue well into the economic recovery as well as beyond and this bodes well for Advance Auto Parts. The further increase in foreign vehicles also bodes well for the company's foreign parts division. On the other hand, I think the recent consolidation of auto parts manufacturers limits the number of suppliers Advance Auto Parts can purchase its inventory from and gives the suppliers more pricing power which may affect the companies margins over time.

The market for auto parts is somewhat mature and mostly fragmented. Although the company's growth through aging vehicles is sound, most of Advance Auto Parts growth is from the opening of new stores. The company targets demographic areas where it believes there to exist a large number of older vehicles and this strategy has paid off well for the company in my opinion. In 2011, Advance Auto Parts opened 104 new stores and 9 Autopart International stores while closing 4 stores and 1 Autopart International store. This brings the total to 3,662 stores of which 202 are Autopart International stores. The company also reported metrics that beat analyst expectations in just about every category.

The company is also continuing its share repurchasing program and is profiting significantly from it-- creating value for its current share holders, in my opinion. The company reported the repurchase of 9.9 million shares at an average price of $61.50 per share. A discount of almost $30 per share at the stock's current price. Advance Auto Parts has also recently released its earnings per share guidance for 2012 and it is in line with analysts' estimates. The company expects earnings per share of $5.55 to $5.75 per share and analysts were expecting about $5.64 per share for 2012. This number could actually be significantly greater at the rate the company is repurchasing its shares so look for some earnings surprises in 2012, in my opinion. The company also reported an increase in its free cash flow from $466 million a year ago to $507 million in the latest quarter, an increase of about 9%, so everything looks stable on the financial front.

I believe Advanced Auto Parts is a great example of how a company can undergo a healthy growth rate. I expect the company to undergo stable, solid growth in the coming years. I recommending buying shares of Advanced Auto Parts and holding for the long-term.

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