Advance Auto Parts A 'Fixer Upper' Story At An Attractive Entry Point

Advance Auto Parts, Inc. AAP has lost nearly 40 percent since the start of 2017 and has now become a compelling investment, at least according to analysts at Jefferies.

Jefferies' Bret Jordan upgraded Advance Auto Parts' stock from Hold to Buy with a price target lowered from $150 to $130 as the company's risk/reward profile is now attractive.

Shares of the auto parts retailer are now trading at a 12.x multiple on forward year P/E, which is below the company's five-year average of 15.9x and its 10-year average of 14.2x, the analyst noted. As such, the current valuation provides investors with a an attractive entry point for a "fixer upper story" given the company's significant long-term margin potential coming from improving operating efficiencies and not necessarily growing sales.

Advance Auto Parts has targeted $750 million in cost savings over a four-year period, which will eliminate its reputation of boasting a "fat overhead" along with an inefficient supply chain, Jordan continued. Over the longer term, the company can boost its EBIT margins to a range of 13 to 14 percent which implies an earnings per share above $11.

Also working in Advance Auto Parts' favor is its 58 percent exposure to the commercial market positions it very well to offset and pressure in the do-it-yourself market.

Bottom line, while investors should continue to expect near-term pain, the longer-term story is attractive at current levels.

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