Why This Dip in Advanced Auto Parts May be an Opportunity

If you're willing to take a long position, there are signs that Advance Auto Parts stock may present investors with an opportunity

By Chris Markoch

MarketBeat.com - MarketBeat

This story originally appeared on MarketBeat

Shares of Advance Auto Parts (NYSE: AAP) gapped down after – wait for it – the company lowered its guidance for the rest of the year. The company is seeing uncertain demand, particularly for its DIY customers as inflation continues to have consumers delay discretionary purchases.

It didn't help that the auto parts retailer reported earnings on what was bound to be a volatile week for equities. Sure enough, as I write this article, AAP stock is down over 13% for the week. This is putting the stock within 10% of its 52-week low that it reached in June 2022.

We don't advocate market timing, so I'll simply acknowledge that AAP stock may have further to fall. But if you're willing to take a long position, there are signs that Advance Auto Parts may present investors with an opportunity.

Demand is Likely to Remain Steady

The latest economic data shows that new car prices continue to rise on a year-over-year basis. On the one hand this shows that pent-up demand for vehicles of all sorts is still strong. But there are several reasons why this only tells part of the story.

  • Rising prices for new cars will make a new car unattainable for individuals below a certain income threshold.
  • Used car prices, though off their peak, remain at historically high levels.
  • Rising interest rates will make the price of financing a car less attractive and may, in fact, price lower income individuals out of the market.

The takeaway is that many customers have financial incentives to hang on to, and maintain, their existing vehicle.

Delivering Parts at the Right Time

That brings up another point. The vehicles of today are becoming increasingly more complicated for the do-it-yourselfer to repair by themselves. However, Advance Auto Parts also does a brisk 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 fashion, often in the same day.

What drives this point home even more is that the company continues to open new locations. The company announced it has opened 78 new stores through the second quarter. That is keeping the company on track to meet its goal of opening between 125 to 150 stores in 2022.

Analysts are Lowering Their Price Targets, But …

Like clockwork, the analyst community began lowering their price targets for AAP stock after the company lowered its forecast. But all the price targets are still well above the stock's current price. In fact, the analysts tracked by MarketBeat give AAP stock a consensus price target of $235 which is a 33% upside from its current level.

And even if AAP stock doesn't climb that high, investors can still take advantage of a juicy dividend. The yield is up to 3.40% and the yearly payout calculates to $6 per share on an annual basis. Supporting the dividend is the company's free cash flow (FCF). FCF was down 84% year-over-year in the first half. However, the last two years are probably outliers in terms of the company's free cash flow. And the company expects that number to improve in the second half of the year.

AAP Stock is a Solid Choice for Value Investors

At a price of around $176 as of this writing, AAP stock has a forward price-to-earnings ratio of 11.78 which suggests the stock may be undervalued. The company's core DIY customers may still face headwinds from inflation and a slowing economy into 2023. However, investors that are willing to take a long position can benefit from a company that is expanding and showing strong operating margins. Add in a juicy dividend and the stock looks like a strong choice for value investors.

Related Topics

Editor's Pick

Everyone Wants to Get Close to Their Favorite Artist. Here's the Technology Making It a Reality — But Better.
The Highest-Paid, Highest-Profile People in Every Field Know This Communication Strategy
After Early Rejection From Publishers, This Author Self-Published Her Book and Sold More Than 500,000 Copies. Here's How She Did It.
Having Trouble Speaking Up in Meetings? Try This Strategy.
He Names Brands for Amazon, Meta and Forever 21, and Says This Is the Big Blank Space in the Naming Game
Business News

These Are the Most and Least Affordable Places to Retire in The U.S.

The Northeast and West Coast are the least affordable, while areas in the Mountain State region tend to be ideal for retirees on a budget.

Business News

I Live on a Cruise Ship for Half of the Year. Look Inside My 336-Square-Foot Cabin with Wraparound Balcony.

I live on a cruise ship with my husband, who works on it, for six months out of the year. Life at "home" can be tight. Here's what it's really like living on a cruise ship.

Business News

The 'Airbnbust' Proves the Wild West Days of Online Vacation Rentals Are Over

Airbnb recently reported that 2022 was its first profitable year ever. But the deluge of new listings foreshadowed an inevitable correction.

Business News

'I Don't Feel Like It's Unreasonable': A-List Actor Refused Service At Hotspot For Not Following Dress Code

Academy Award-winning actor Russell Crowe had quite the afternoon after trying to stop at a Japanese steakhouse in Melbourne, Australia following a game of tennis.

Business Solutions

Master Coding for Less Than $2 a Course with This Jam-Packed Bundle

Make coding understandable with this beginner-friendly coding bundle, now just $19.99.

Business Ideas

55 Small Business Ideas To Start Right Now

To start one of these home-based businesses, you don't need a lot of funding -- just energy, passion and the drive to succeed.