Advance Auto Parts can keep the good times

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However, investors have been slower to realize this. Shares of Advance Auto Parts are up 32% since the start of 2020, but have fallen 30 percentage points behind a basket of retailers. Meanwhile, a basket of used and new car sellers’ inventories have done much better over the same time frame, even after excluding high-growth e-commerce names like Carvana.

The successful profits seen in the used car sales industry will end when the chip shortage subsides. However, the effects on the auto parts and repairs business could prove to be long-lasting. The average age of cars and light trucks on American roads is a record 12.1 years according to IHS Markit. In particular, there has been healthy growth in cars aged 4 to 11, which is considered a sweet spot as they have often exceeded their warranty and can be serviced by independent garages, a large customer cohort for Advance. Auto Parts.

The scarcity of new vehicles and the rise in used car prices should prompt more car owners to continue repairing their existing vehicles for some time, especially in the absence of another round of stimulus checks. Of course, those prices could be dropping from their highs – data from Manheim shows wholesale used vehicle prices edged down in July compared to June. But they are still 24% more expensive than a year earlier, so a return to normal pricing could take time. Automakers have said the chip shortage could weigh on production until the second half of this year.

Meanwhile, the warmer-than-average summer this year is also expected to help increase parts demand, just as the harsh winter did earlier this year. And the kilometers traveled by vehicles always recover, creating more wear and tear.

Skeptics might fear that sales are already near their peak. In its first quarter ended April 24, Advance Auto Parts saw same-store sales jump 24.7% from the previous year. Compared to its peers, however, Advance Auto Parts appears to have a longer growth track.

On the one hand, its activity relies more on auto repair professionals, who represent around 60% of sales. That was a drag last year as consumers cautious of the pandemic opted for do-it-yourself repairs or postponed work. Demand from professionals is just starting to catch up.

Additionally, auto parts didn’t really take off last year in the northeast, the company’s largest market, as the region’s mobility was severely affected by the pandemic. This market is experiencing a healthy recovery in demand for auto parts, and a return to severe restrictions seems less likely in the heavily vaccinated region.

There is also more room for an assessment in terms of valuation. Advance Auto Parts shares return 1.31 times the company’s value to 12-month revenue, while its peers AutoZone AZO 1.20%

and O’Reilly Automobile ORLY -0.18%

recover 2.9 times and 3.6 times, respectively, according to FactSet.

The company has fallen behind in recent years as its management, which took the reins after the purchase of a stake by activist investor Starboard Value in 2015, failed to meet targets that some analysts initially deem unrealistic. .

Scot Ciccarelli, analyst at RBC Capital Markets, notes in a report that management inherited a “very complex business that required a ton of work.”

A global chip shortage is affecting how quickly we can drive a car or buy a new laptop. WSJ visits a manufacturing facility in Singapore to see the complex chip-making process and how a manufacturer is trying to overcome the shortage. Photo: Edwin Cheng for The Wall Street Journal

Most of the heavy lifting is now behind Advance Auto Parts. In recent years, the company has reshuffled its organizational culture, found efficiencies among its four different store banners, and invested wisely in technology, according to Mr. Ciccarelli’s report.

After years of declining or slowly improving operating margins, the business appears to be recovering. Its annual margins for 2020 were 7.9%, almost a percentage point higher than the previous year. Analysts polled by FactSet now find the company’s 2023 operating margin target of 10.5% to 12.5% ​​realistic.

It’s time for investors to take a peek under the hood.

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Write to Jinjoo Lee at [email protected]

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