Encouraging signs of improvement
AAP reported a robust Q218, beating expectations for comps, margins and EPS, while inventory was well-managed and cash flow generation strong. A strengthening sales backdrop and company-specific initiatives are driving sequential improvements and we expect momentum to continue. With AAP showing early evidence that it can partially close the performance gap to peers, the company remains committed to a mid-teens operating margin longer-term (vs 7.5%-7.8% in FY18). We raise our DCF-based PT to $175, although we only forecast a 12.5% operating margin longer-term and note that our DCF implies a share price >$200 if we assume a mid-teens margin, demonstrating the potential upside. We remain Overweight.Advance Auto Parts is an automotive aftermarket parts provider in North America, serving both professional installers (Professional), and do-it-yourself (DIY), customers as well as independently owned operators. The company's stores and branches provide a range selection of brand name, original equipment manufacturer and private label automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars, vans, sport utility vehicles and light and heavy duty trucks. Through its integrated operating approach, the company serves its Professional and DIY customers through a variety of channels ranging from brick and mortar store locations to self-service e-commerce sites.
Formed in 2003 by an established team from Cazenove, one of the most respected investment banks in the UK, Atlantic Equities conducts and publishes fundamental, bottom up research on mid and large cap US companies.
Atlantic provide order execution through a wide range of DMA products and algorithmic trading suites.
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