Advance Auto Parts: Buy, Sell, or Hold?

Advanced Auto Parts (AAP 1.98%) isn’t just disliked among financial market commentators; it’s actually despised. Even long-standing value investors have made a pariah of this automotive parts standby.

In a time when new vehicles are expensive and the average age of a car on the road is 12.5 years, Advance Auto Parts stock should be an obvious buy-and-hold. Yet, the company’s first-quarter financial report was so disastrous that Advance Auto Parts stock went from a no-brainer to a no-go for many prospective investors.

Still, if you dare to venture where others won’t, there may just be a bargain afoot with this beaten-down auto parts purveyor.

A quarter fully stocked with gloom and doom

Practically everything that could possibly go awry in a quarterly financial report actually happened all at once with Advance Auto Parts in Q1 2023. The only not-completely terrible part was the company’s sales, which grew 1.3% year over year to $3.42 billion and just barely missed the analyst consensus estimate. After that, it’s all downhill.

Advance Auto Parts’ EPS of $0.72 drastically missed Wall Street’s call for $2.60 and came in far below the year-earlier period’s EPS of $2.26. CEO Tom Greco offered up excuses as to why Advance Auto Parts’ quarterly operating margin rate of 2.6% came in “well below expectations,” citing “higher-than-planned investments to narrow competitive price gaps in the professional sales channel as well as unfavorable product mix.”

But wait — there’s more pain to come. Advance Auto Parts slashed its fiscal 2023 EPS outlook from a previous range of $10.20-$11.20 to a revised range of $6.00-$6.50. On top of all that, the company lowered its 2023 comparable-store sales guidance from 1% to 3%, to a range of -1% to flat.

Moreover, after slimming up the company’s dividend payments from $0.06 per share in 2019 to $1.50 in 2022, Advance Auto Parts suddenly chopped its quarterly dividend to just $0.25 per share.

Its stock gets sent to the junk yard

The single-session 30% share-price drop that ensued post-earnings was horrifying, but pulled back the chart, and you’ll see that it’s a continuation of a steeper drop. After topping out at around $240 in late 2021/early 2022, Advance Auto Parts’ stock has managed to plumb the $70 level, surpassing even the COVID-19 bottom.

As a contrarian investor, I relished the challenge of defending the indefensible. First and foremost, Advance Auto Parts is still profitable and has an enticing trailing 12-month P/E ratio (10.4 versus the sector median of 16.7); price-to-book ratio (1.6 versus the sector median of 2.3); and price-to-sales ratio (0.4 versus the sector median of 0.9). None of these attractive metrics would have been possible without the dreadful quarterly miss-and-reduce (as opposed to beat-and-raise).

Next, consider that after raising its dividends too much, Advance Auto Parts now has a dividend that’s probably more sustainable. If the company’s dividend payout ratio is now 44%, that’s not unreasonable (in my humble opinion) as my internal alarm bells typically don’t ring until a payout ratio exceeds 50%.

And if financial commentators truly can’t stand Greco, they should celebrate his announced retirement at the end of this year. If any event could mark a new chapter in the ongoing story of Advance Auto Parts, this would be it. There’s been no update so far as to Greco’s replacement, so stay tuned.

Finally, if you truly believe that the financial markets are efficient, poor Q1 results and downbeat full-year guidance should be considered fully known and priced-in factors. From here, with the critics out in full force and expectations at rock bottom, it feels like there’s nowhere to go but up for Advance Auto Parts.

So if you have a deep contrarian streak and are willing to stay the course through the CEO succession, I invite you to hold your nose and buy a few shares of Advance Auto Parts. It won’t necessarily be a smooth ride, but at least you can save up some gas money with whatever’s left of the dividend.