A Hidden Gem in the Auto Parts Industry
In a market dominated by giants like Autozone and O’Reilly, Advance Auto Parts (AAP) often flies under the radar. With a market capitalization of just $2.4 billion, it’s dwarfed by its competitors. However, this valuation disparity is misleading.
Undervalued and Overlooked
Advance operates nearly 4,800 locations, while Autozone and O’Reilly have around 7,400 and 6,200, respectively. The difference in size isn’t as drastic as the market valuations would suggest. Moreover, Advance has been working to address its problems and is on the cusp of receiving a massive $1.2 billion payday.
The Worldpac Deal: A Game-Changer
Advance has agreed to sell its Worldpac business for $1.5 billion, netting approximately $1.2 billion after transaction expenses. This deal is expected to close in the fourth quarter and will provide a significant influx of capital for the company. Worldpac generated $2.1 billion in revenue and $100 million in EBITDA over the past year, making the sale price a fair one.
Financial Flexibility and Restructuring
The sale of Worldpac will give Advance the financial flexibility it needs to navigate the changes required to improve its profitability. New CEO Shane O’Kelly, a supply chain expert, has identified the company’s inefficient supply chain infrastructure as a major issue. A multiyear transformation is underway, and if successful, could lead to significantly improved returns for shareholders.
A Potential Quadrupling of Value
If Advance can achieve a 10% margin, still half of what its peers have, it could generate nearly $1 billion in annual profits. With a valuation of 10 times its operating profit, shares could quadruple in value. The restructuring of the supply chain is crucial, but costly, and the company’s balance sheet isn’t ideal. However, selling Worldpac will even out Advance’s balance sheet and provide breathing room for management to make key decisions.
A Bargain Valuation
Considering the potential for growth and the current valuation, Advance stock appears to be trading at a bargain price. While there are risks involved, the company’s efforts to address its problems and the impending influx of capital make it an attractive option for investors.
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