Morningstar | Muted 2019 Guidance Does Not Alter Our View of Advance's Long-Term Prospects; Shares Trade Fairly
We do not anticipate making a large change to our $172 per share valuation for narrow-moat Advance after it posted on-track 2018 earnings but somewhat soft 2019 guidance. We attribute management's lackluster assessment to conservatism and timing, and still expect that the company should be able to materially boost performance over the years ahead. Our long-term forecast still calls for mid-single-digit average top-line growth and adjusted operating margin expansion toward 12% over the next decade.Advance's 2018 sales rose 2% to $9.6 billion alongside 51 basis points of adjusted operating margin expansion to 7.8% (consistent with our expectations). Management established its 2019 guidance at $9.65 billion to $9.80 billion in sales and an 8.0% to 8.4% adjusted operating margin, slightly behind our $9.83 billion and 8.5% targets.
We attribute the difference between our 2019 target and management's expectations to conservatism (as we expect a sound economy, moderate gas prices, and an increasing number of vehicles in auto part retailers' sweet spot to result in a strong year for the sector) and the cadence of the company's multiyear turnaround, as necessary investments weigh on short-term results in favor of long-term improvement. Despite potential near-term sluggishness, we still believe Advance has significant room to boost top- and bottom-line results as it optimizes inventory and availability while improving efficiency. We maintain that management's push to unify systems, distribution networks, and back office functions will bear fruit, despite leadership's estimate that it will spend $80 million to $120 million on technology, supply chain, and marketing investments that will weigh on 2019 profitability. Still, our long-term operating margin forecast (which sees Advance exceed 11% over the next five years) lags management's low-teens expectation, reflecting the challenges and risks associated with the turnaround.
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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