Morningstar | On-Track 1Q Results Leave Our Outlook in Place for Advance; Shares Trade Fairly
Our $180 fair value estimate for narrow-moat Advance should not change significantly after it posted solid first-quarter results. We still anticipate mid-single-digit average top-line growth and adjusted operating margin expansion to more than 12% over the next decade. While the shares trade at a modest discount to our valuation, we suggest investors await a greater margin of safety before building a position.Advance posted 2.7% revenue and comparable-store sales growth in the period, consistent with our full-year 2.3% top-line target (comparisons become more challenging as the year goes on). Its adjusted operating margin expanded 46 basis points to 8.3%, also not far from our roughly 60-basis-point and 8.4% respective full-year expectations. Management maintained its 2019 guidance at $9.65 billion to $9.80 billion in sales (we call for $9.80 billion) and an 8.0% to 8.4% adjusted operating margin.
The results are consistent with our positive long-term view for Advance as it executes a multiyear turnaround. We are particularly encouraged that management’s pilots of cross-banner replenishment are progressing well. Although a rollout might not reach all of Advance’s network until early 2021, we believe management is taking a prudent approach to ensure operations are not disrupted by the plans, which would allow legacy Carquest stores to call on legacy Advance distribution centers (and the reverse). We assume such an effort will succeed in making distribution more efficient, contributing to around 330 basis points of forecast adjusted operating margin improvement (to just over 11%) from 2018 to 2022.
Management’s indication that it expects to pass the next potential round of tariffs on to customers, as it did with the first volley, aligns with our view of auto-parts retailers’ significant pricing power. We believe the industry benefits from low price elasticity, as the opportunity cost of not having a vehicle is high for motorists in large sellers’ core market.
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.
We have operations in 27 countries.
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