Pick#6 Welcome crow of S&P 500 “AAP” !

Why to enter S&P now?

Question: How many stocks in our portfolio are within Dow, Nasdaq or S&P 500 indexes?
The answer: None !
We were knowing that and we are competing with the indexes with companies of higher future protentional than that of the index’s companies. Honestly there wasn’t a golden opportunity as most of the companies of the indexes trading at high valuation above fair value. Mainly because of global focus on that companies. Who is in this globe trading in any market and doesn’t know what is Apple, Microsoft, Amazon or Tesla. However, we believe the universal focus on those stock had driven them to high valuation that was good for those entered in years ago, but not now.

To the point, now we had found an opportunity within S&P 500 that fill our golden statement “a stock that has high protentional to double in price within the coming 2 to 3 years”. It is the crow of S&P 500 ! it is Advance Auto Parts “AAP” !

What is AAP?

Advance Auto Parts, Inc. “AAP”, an American automotive aftermarket parts provider that was founded in 1932 and has since grown into one of the largest automotive aftermarket parts providers in the United States. The company is headquartered in Raleigh, North Carolina, and operates over 4,900 stores across the United States, Puerto Rico, the U.S. Virgin Islands, and Canada. The company operates through various channels, including company-operated stores, online, and independently owned stores. AAP offers a wide range of automotive products and services, including replacement parts, accessories, batteries, engine components, and maintenance items. They serve both professional installers and do-it-yourself customers.

AAP, the crow of S&P 500

The beautiful dream of AAP traders ended on Jan 2022 when APP recorded highest ever price above $244. After then and based on our current analysis AAP is now No.1 most punished profitable stock under S&P 500 from that day with continuous decline reaching almost 1/4 of its peak recorded just 1.5 years ago ! What is the cause of this dramatic change from new Peak to the lowest of 10 years in short period ! We will discuss it below, but let’s continue some facts.

On 31st May 2023, AAP faced the worst trading day ever since went public on 2001 with drop of third of its value at that day. Just after reporting its results and cutting its quarter dividend from $1.5 to $0.25. In 9th June 2023, it had its lowest price in 10 years at $63.56. After that it is started some recovery to trade around $70. Even with price, AAP is trading at lower than 50% of its price at beginning of 2023, a continuation for the decline started on Jan 2022 or for the last 18 months.

Let’s have a look in the trends of AAP in last 10 years from trends of Macrotrends explaining above.

AAP drop cause, the golden question !

Some refer the cause to Starboard Value Fund who recommended the stock on 2015 and sold it completely by May 2021. But, we don’t believe on that as the stock continued to perform from May 2021 till Jan 2022 with new peak. In addition, as per today there are more than 1200 Fund and institutions with long position in AAP [reference]. To add more, directors of AAP had bought the stock on June 2023 for total value of more than $1,400,000 as shown below opposing market drop fear.

Some refer that to the extreme jump in dividend contributions in the last quarters. But again, the stock had did a rally in 2015 and again after 2018 while dividends was historically low. For us, it is partially current financial conditions added to the mode of investors for current expected drop in dividends. But none worth such a drop as those conditions were their before while stock trading high. For reference, below is the quarter dividend contribution of AAP from 2006. I agree with those indicating that AAP had gone high with dividend to create a mess in the stock price.

To summarize below based on available records, AAP provide dividend on each quarter. For 56 quarters starting Q1 2006, it was giving the same dividend of $0.06. This practice ended on Q4 2019. During that period, AAP had peaked twice, once to $200 and a second after a drop to $175. Later, dividend increased to $0.25, then $1 then $1.5 ending by Q4 2022. Now, the company is announced $0.25 for Q1 2023 which will be paid for owners on 13th July 2023.

Regarding revenues and sales of the companies, there is no cause for a drop from its highest in Jan 2022 to its lowest in 10 years in June 2023. Below is the revenues of the last 5 years.

Year	2018	2019	2020	2021	2022	2023 E
Revenues (Billions $)	9.58	9.71	10.11	11	11.15	11.3

Do you want to have more fun, Last quarter on April 2023, the company announced one of its highest revenues ever at $3.42B. Net income was positive at $1.38B and lowered for high raw material cost and air freights as explained by the company.

Even if we gone to “Price to Book” for the last 5 years it was within 1.29 to 1.57. It is around 20% impact in 5 years ! Below is the Earning Per Share “EPS” from 2010 till today for each quarter from Macrotrends. Actually, 2022 as seen can be considered one of the best years for earning to the company. Historically, there was bad quarters, but followed with a bounce in profit in next quarters. That what we are aiming for and be ahead of others. As we highlighted before, the punishment in the share is too higher than the real business impact to the company. We feel the company had faced down trend of business previously and got back stronger and we feel the same will happen in future.

Actually, the issue is within current issue of reduction in profit and then in dividend where AAP was considered a source of passive income. AAP’s business is influenced by economic conditions, as consumers will defer vehicle repairs during downturns which economy is facing now due to layoff and low individual income. If this issue resolved by cutting the current issues, the the stock it back to clear double in price. But, another can look for this as opportunity not the opposite. That because low income will stop buying new cars, and delaying repair is just worsen the condition and not cancelling the requirement. At end that may drive higher demand in future. That could explain each bounce in profit after a drop in the last 10 years.

Historically, AAP did speedy bounce thrice from such level in the last 10 years as seen in the first trend in this report. First from $75 in Oct 2013 to $183 in Oct 2015. The second started from $81 in Nov 2017 to $177 in Nov 2018. The third from $75 on Mar 2020 to above $240 on Dec 2022. The CEO of the company will be replaced on end of the year and new vision will be set. For us and based on profitable and dividend provider company, the hit was too much.

At end, AAP has PE ration of around 10 which considered fair and relatively safe. The company had given $6 dividend for the last 12 months accounting for most of its profits of $6.73 per share for the last 12 months. Current yield is 8.67%. Any return to growth in profit will lead to increase of price.

The current issue of reduction in profit is contributed to below:

• Weak financial performance, lower-than-expected earnings, and concerns about future growth prospects
• Competitive Pressure with increased competition from rivals affecting market investor confidence.

AAP faces competition from several other companies operating in the automotive aftermarket parts industry. None had got a hit as AAP. Some of its key competitors include:

• AutoZone Inc.
• O’Reilly Automotive Inc.
• Genuine Parts Company
• LKQ Corporation
• Pep Boys (Manny, Moe & Jack)
  

Strengths and Weaknesses of AAP Stock

Strengths of AAP stock:

• Advance Auto Parts has a strong brand presence and a long-standing history in the industry.
• With thousands of stores across North America, AAP has a broad physical footprint.
• AAP caters to both professional installers and DIY customers, providing a diverse revenue stream.

Weaknesses of AAP stock:

• The automotive aftermarket industry is highly competitive, with numerous players vying for market share.
• AAP’s business is influenced by economic conditions, as consumers may defer vehicle repairs during downturns.
• The shift towards online retailing poses a challenge to brick-and-mortar retailers like AAP.
  

Conclusion

For us AAP is buy at current price at least for one pick which we already did and included to our portfolio. Bounces after a drop has difference shapes. If it is a speedy bounce like what happened twice to the share then we are in. In case it tend to drop more of stabilize then in future we can add more after reanalyzing the company. For reference, on 14th June 2023, there was 2 million dollar buy from insider on AAP, so, there is a believe on the company even from insiders [reference].

To keep our transparency below is our current portfolio position in blue. We are just with DJIA and minimizing the gap with S&P 500 and Russel.