Strangely, Mr. Market likes an old-fashioned auto parts store. Advance Auto Parts Inc. (NYSE: AAP) share price rose from $156.31 on 31 August 2020 to $199.44 on 3 September 2021.
Advance Auto Parts (AAP) operates 4,289 Advance Auto parts stores in the United States. Advance also services 1,300 Carquest franchises in the US, Canada, Puerto Rico, and the US Virgin Islands and over 100 Worldpac branches. Hence, Advance claims to operate over 5,200 auto parts stores.
Demand for Advance’s services could grow because America’s autos are aging. The average age of the US vehicle grew by 16% between 2010 and 2020, V12 estimates. Similarly, average length of vehicle ownership increased by 60% in the last decade, V12 claims.
Thus, American vehicles are aging and in more need of aftermarket maintenance, which means more demand for auto parts. Notably, V12 estimates that older car owners were twice as likely to spend over $1,000 fixing their vehicle. Hence, Advance Auto Parts business could be growing.
How much money Does Advance Auto Parts Make?
Advance Auto (AAP) is making more money, however, the growth is not that great. For example, Advance’s quarterly gross profit grew from $1.097 billion on 31 July 2020 to $1.183 billion on 31 July 2021.
Similarly, the quarterly revenues grew from $2.501 billion on 31 July 2020 to $2.649 billion on 31 July 2021. However, no quarterly operating income numbers for Advance were available in July 2021. The most recent quarterly operating income number for Advance Auto Stockrow offered was $244.93 million on 30 June 2021.
Importantly, Advance’s revenues are growing. Stockrow estimates Advance Auto’s revenues grew by 12.01% in the quarter ending on 31 July 2021. In contrast, Advance Auto Parts’ revenues grew from 18.38% on 31 July 2020.
However, Advance Auto is generating more cash. Its quarterly operating cash flow grew from $437.30 million on 31 July 2020 to $446.23 million on 31 July 2021. Notably, no quarterly ending cash numbers for Advance Auto Parts were available on 31 July 2021. The most recent quarterly ending cash flow for Advance Auto Parts was -$70.95 million on 30 June 2021.
Advance Auto survives without borrowing
Impressively, Advance Auto Parts (NYSE: AAP) survived the pandemic without borrowing money. Notably, Advance reported seven straight quarters of negative quarterly financing cash flows on 31 July 2021.
For instance, Advance Auto Parts reported a quarterly negative financing cash flow of -$459.75 million on 31 July 2021. That number fell slightly from -$519.13 million on 31 July 2020.
Consequently, Advance Auto Parts’ total debt fell from $3.713 billion on 31 July 2020 to $3.588 billion on 31 July 2021. Thus, Advance Auto finished the pandemic with less debt.
In contrast, Advance Auto Parts finished the pandemic with less cash. Advance Auto Parts’ cash and short-term investments fell from $1.142 billion on 31 July 2020 to $809 million on 31 July 2021.
What Value Does Advance Auto Parts Have?
Similarly, Advance Auto Parts (AAP) lost value during the pandemic. Advance Auto Parts Total Assets fell from $11.391 billion on 31 July 2020 to $11.839 billion on 31 July 2021.
Thus, the revenue growth at Advance Auto Parts is not leading to more value and cash. Hence, Advance finished the pandemic with less value and less cash. Yet, Mr. Market cannot see this. Instead, he spends more for a company with less value.
I think Advance Auto Parts is an overpriced stock with a low margin of safety. The margin of safety is low because the value and cash is shrinking.
However, Advance pays an impressive dividend. For example, AAP will pay a $1 quarterly dividend on 16 September 2021. That dividend grew from 25₵ on 18 March 2021. Overall, Advance Parts offered a 1.96% dividend yield, and a $4 annual dividend on 31 August 2021.
Thus, Advance Auto Parts is an attractive dividend stock. However, it is a dividend stock with a low margin of safety. Investors can make money from Advance but they need to be careful with this company because its moneymaking capacity appears to be shrinking.
Originally published at https://marketmadhouse.com on September 2, 2021.
