Advance Auto Parts, Inc. (NYSE:AAP)

CAPS Rating: 4 out of 5

The Company primarily operates within the United States automotive aftermarket industry, which includes replacement parts, accessories, maintenance items, batteries and automotive chemicals for cars and light trucks.

Recs

3
Player Avatar JohnCLeven (75.94) Submitted: 9/10/2012 11:16:59 AM : Outperform Start Price: $68.41 AAP Score: +24.01

Profitability looks fantastic: 5 yr avg ROIC is 19%, 5 yr avg ROE is 27% (ROE has been at least 22% every year for past 9 yrs) and both metrics averages has been rising consistently over the past decade.

Growth looks robust. EPS has grown EVERY SINGLE year for the past decade. 5yr EPS growth rate 18%, 3 yr EPS growth rate 26%. Consensus estimated EPS growth per yr for the next 5 years is 12.6%. Book value per share, operating cash flow per share, and free cash flow per share have seen tremendous growth over the past decade to the tune of over 13% compounded annually over the past 10 years.

Buyback alert! The share count has dropped over 7% PER YEAR for the past 4 years.

Valuations are low across the board and well below AAP’s historic averages: 10x FCF, PE of 12.9, EV/EBIT 7.4. Also debt/equity 0.6.

However, AAP dosen't seem to have a significant moat/durable competitive advantage compared to the competion. There also could be headwinds due to pent up demand for new cars. On the plus side, AAP only has 10% of its stores west of the Mississippi. It’s appears to have PLENTY of room for growth.

Conclusion: While AAP does not have a durable competitive advantage, it does appear to be a very well run, robustly growing, shareholder friendly business at a very cheap price relative to it future earnings potential. I believe it will outperform.

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Member Avatar JohnCLeven (75.94) Submitted: 10/18/2012 11:07:50 AM
Recs: 0

I purchased AAP in RL at $67.49 on 10/18/2012

In addition to the data mentioned about, a reverse discounted cash flow analysis shows that AAP is currently priced for 2-3% annual free cash flow growth. Given AAP’s 10 yr free cash flow compounded annual growth rate of 20%, it’s 5yr FCF CAGR of 47%, and it’s 3 yr FCF CAGR of 30%, expectations of 2-3% FCF growth going forward seem pretty ridiculous. Reverse DCF shows AAP to be 40% undervalued if FCF grows at 5% going forward, and 65% undervalued of FCF grows at 7%. Given AAP’s history, those estimates seem pretty darn conservative.

AAP has a business I can understand, with a history of consistent growth, buybacks, consistently impressive returns on capital, and is quite cheap! Even modest future growth makes AAP a steal at today’s price at 10x free cash flow.

Pent up new car demand be damned!

I am now long BRK.B, UPS, COH, and AAP.

Member Avatar JohnCLeven (75.94) Submitted: 11/12/2012 9:39:33 PM
Recs: 0

Using a basic DCF analysis I'm showing a stagnation value of $109, $87 with a margin of safety. I used a discount rate of 8% (Calculated WACC) and used a 0% growth rate. With a 5% growth rate, the intrinsic value of AAP is about $165, $130 with a margin of safety. Now, i'm new at this, but if that's correct, holy cow!

But i'm still not confident in these dcf things yet...

Member Avatar valuemoneygreen (82.78) Submitted: 2/18/2013 12:36:20 AM
Recs: 0

I read this pitch again and looked at the company a little closer and I am liking the pick more and more especially at the price you purchased it at. I think you made a good buy. It has everything I look for in a company but as you stated the durable competitive advantage isn't there. I think management and business model is making up for it though. This could be a private equity takeover with the numbers I see. Well good luck with the pick. And don't sell yourself short and back down too much on your thinking. Your ADM pick is an example....see you liked it at that price and so did Berkshire....they bought it in RL......I am surpised you said that you wouldn't when it is a dividend aristocrat and has a long long proven history....even more disappointed I didn't spot it....just goes to show I need to look at YOUR picks better :)

Member Avatar JohnCLeven (75.94) Submitted: 2/18/2013 5:06:53 PM
Recs: 0

Thanks valuemoney,

Also, I didnt forget about your comment on my Dow Jones blog, i've been busy and just wanted to make sure I give your question a decent and not rushed response.

Member Avatar JohnCLeven (75.94) Submitted: 2/18/2013 9:26:28 PM
Recs: 0

"And don't sell yourself short and back down too much on your thinking."

I really try not to, BUT with only 2+ years of studying the market, 1 year using CAPs, and 8 months investing in real life, I haven't developed a long term track record of success quite yet. The longer I do this, the more confident i'll become.

I often recall the Buffett saying, "“If you've been in the poker game for 30 minutes, and you don't know who the patsy is, you're the patsy.”

When I think I have a decent investing idea, I have the perverbial angel on one shoulder saying, "If your data and reasoning are correct, you have nothing to fear!", and the devil on the other shoulder shouting, "Do you really think Wall Street could miss such a great idea? Do you really think you're smarter than the market? YOU'RE THE PATSY!"

As far as ADM goes, earnings and cash flows are choppy, ROE has only averaged 12% over the past deacde and has been rather inconsistent. (I once calculated the average ROE of Bufett buys from 2002-2012 to be like 23%) Perhaps most importantly, the company deals with agricultural COMMODITIES. As far as investing goes, brands/franchises are vastly preferred over commodities. Frankly, I was shocked when I saw ADM on Berkshire's 13-F and not WU, an old Todd Combs favorite, selling way below the price he bought it at for his fund like 4 or so years ago, and also said in an interview at the time that WU was among his favorite companies of all time.

Anyway, thanks again for the compliment, we'll see how I do over the next 2-3 years. I have a pretty good hunch that i'll do quite well...but then again, I could be the patsy!

Member Avatar valuemoneygreen (82.78) Submitted: 2/19/2013 1:48:20 AM
Recs: 0

agricultural COMMODITIES

nuff said..... I preach to stay clear of that myself.....if you don't feel 100% confident then stay away....there are many other opportunities out there.....keep bloging also I like hearing your thoughts!

Member Avatar JohnCLeven (75.94) Submitted: 10/16/2013 9:53:29 AM
Recs: 0

Note to self: Up 18% today after acquisition.
http://www.reuters.com/article/2013/10/16/us-advanceautoparts-acquisition-generalp-idUSBRE99F0CG20131016

Member Avatar JohnCLeven (75.94) Submitted: 10/21/2013 11:39:25 AM
Recs: 0

Note to self: Sold entire AAP position today at $96.74. Including dividends, that results in a total return of 45% in the 368 days that I owned the company. Reallocated the capital to buy more shares of IBM.

Member Avatar JohnCLeven (75.94) Submitted: 12/10/2013 12:56:51 PM
Recs: 0

Ending pick today.

May re-open someday after I get a chance to see what the private company they just aquired looks like.

Member Avatar JohnCLeven (75.94) Submitted: 12/10/2013 12:58:47 PM
Recs: 0

Ending price $108.80

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