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 sees 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. As I write this article, AAP stock is down over 13% for the week. This puts the stock within 10% of its 52-week low reached in June 2022.
We don’t advocate market timing, so I’ll 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 year-over-year. 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.
- Though off their peak, used car prices 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 vehicles.
Delivering Parts at the Right Time
That brings up another point. Today's vehicles are becoming increasingly more complicated for the do-it-yourselfer to repair themselves. However, Advance Auto Parts also does brisk business with professional installers. And the company’s growing footprint makes it an option for these businesses to get the parts they need in a timely fashion, often on the same day.
What drives this point home even more, is that the company continues to open new locations. The company announced it had opened 78 new stores through the second quarter. That is keeping the company on track to meet its goal of opening 125 to 150 stores in 2022.
Analysts are Lowering Their Price Targets
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. 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 annually. 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 regarding the company’s free cash flow. And the company expects that number to improve in the year's second half.
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, suggesting the stock may be undervalued. The company’s core DIY customers may face headwinds from inflation and a slowing economy into 2023.
However, investors 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.