Why this dip in advanced auto parts can be an opportunity
Shares of Advance Auto Parts (NYSE: AAP) tumbled after – wait for it – the company lowered its outlook for the rest of the year. The company is seeing uncertain demand, especially for its DIY customers, as inflation continues to cause consumers to delay discretionary purchases.
MarketBeat.com - MarketBeatIt didn't help that the auto parts retailer posted earnings in what was expected to be a volatile week for stocks. Sure enough, as of this writing, AAP stock is down more than 13% for the week. This puts the stock within 10% of its 52-week low that it reached in June 2022.
We're not advocating market timing, so I'm just acknowledging that AAP stock could drop further. But if you're willing to go long, there are signs that Advance Auto Parts could present an opportunity for investors.
Demand should remain stableThe latest economic data shows that new car prices continue to rise year over year. On the one hand, it shows that pent-up demand for vehicles of all kinds is still strong. But there are several reasons why this only tells part of the story.
Rising new car prices will make a new car unaffordable for people below a certain income threshold. Used car prices, although below their peak, remain at historically high levels. Rising interest rates will make the price of car financing less attractive and may, in fact, exclude low-income people from the market.The takeaway is that many customers have financial incentives to keep and maintain their existing vehicle.
Deliver parts at the right timeThis raises another point. Today's vehicles are more and more complicated to repair by the do-it-yourselfer. However, Advance Auto Parts also does good business with professional installers. And the company's growing footprint makes the company an option for these businesses to get the parts they need in a timely manner, often the same day.
What motivates this point even more is that the company continues to open new sites. The company announced the opening of 78 new stores during the second quarter. This keeps the company on track to meet its goal of opening between 125 and 150 stores in 2022.
Analysts Lower Price Targets, But...Like clockwork, the analyst community began lowering its price targets for AAP shares after the company lowered its forecast. But all price targets are still well above the current stock price. In fact, analysts tracked by MarketBeat give AAP stock a consensus price target of $235, up 33% from its current level.
And even if AAP stock doesn't climb as high, investors can still enjoy a hefty dividend. The yield is up to 3.40% and the annual payout is $6 per share on an annual basis. The backer of the dividend is the company's free cash flow (FCF). FCF was down 84% year over year in the first half. However, the past two years are likely outliers in terms of the company's free cash flow. And the company expects that number to improve in the second half.
AAP Stock is a solid choice for value investing...
Shares of Advance Auto Parts (NYSE: AAP) tumbled after – wait for it – the company lowered its outlook for the rest of the year. The company is seeing uncertain demand, especially for its DIY customers, as inflation continues to cause consumers to delay discretionary purchases.
MarketBeat.com - MarketBeatIt didn't help that the auto parts retailer posted earnings in what was expected to be a volatile week for stocks. Sure enough, as of this writing, AAP stock is down more than 13% for the week. This puts the stock within 10% of its 52-week low that it reached in June 2022.
We're not advocating market timing, so I'm just acknowledging that AAP stock could drop further. But if you're willing to go long, there are signs that Advance Auto Parts could present an opportunity for investors.
Demand should remain stableThe latest economic data shows that new car prices continue to rise year over year. On the one hand, it shows that pent-up demand for vehicles of all kinds is still strong. But there are several reasons why this only tells part of the story.
Rising new car prices will make a new car unaffordable for people below a certain income threshold. Used car prices, although below their peak, remain at historically high levels. Rising interest rates will make the price of car financing less attractive and may, in fact, exclude low-income people from the market.The takeaway is that many customers have financial incentives to keep and maintain their existing vehicle.
Deliver parts at the right timeThis raises another point. Today's vehicles are more and more complicated to repair by the do-it-yourselfer. However, Advance Auto Parts also does good business with professional installers. And the company's growing footprint makes the company an option for these businesses to get the parts they need in a timely manner, often the same day.
What motivates this point even more is that the company continues to open new sites. The company announced the opening of 78 new stores during the second quarter. This keeps the company on track to meet its goal of opening between 125 and 150 stores in 2022.
Analysts Lower Price Targets, But...Like clockwork, the analyst community began lowering its price targets for AAP shares after the company lowered its forecast. But all price targets are still well above the current stock price. In fact, analysts tracked by MarketBeat give AAP stock a consensus price target of $235, up 33% from its current level.
And even if AAP stock doesn't climb as high, investors can still enjoy a hefty dividend. The yield is up to 3.40% and the annual payout is $6 per share on an annual basis. The backer of the dividend is the company's free cash flow (FCF). FCF was down 84% year over year in the first half. However, the past two years are likely outliers in terms of the company's free cash flow. And the company expects that number to improve in the second half.
AAP Stock is a solid choice for value investing...What's Your Reaction?
