Advance Auto Parts (NYSE:AAP) has seen something not usually associated with the auto parts industry: growth. The auto parts giant has turned years of stagnation into double-digit profit growth. As a result, the AAP stock price has reached multi-year highs.
However, this massive increase in the price of AAP has also taken valuations to average levels. While I expect AAP stock to perform well for years to come, prospects for sizable stock price increases have more than likely disappeared.
AAP Stock Has Seen Massive Growth in a Mundane Industry
AAP stock rarely makes the news, and even many active stock market observers have never thought of it. Still, investors may need to start paying attention. Since hitting a multi-year low of $78.81 per share a year ago, Advance Auto stock has enjoyed a steady move higher. The stock now trades at around $168 per share, more than 110% higher than that 52-week low.
Most perceive the auto parts as a necessary but mundane industry that typically experiences slow growth. But the business remains a solid one. Cars always break down, and consumers will almost always buy new parts when necessary regardless of the shape of the economy. Also, let’s face it — most shoppers in this industry focus more on getting their car working than on finding the lowest price. Hence, Advance and peers such as AutoZone (NYSE:AZO), Genuine Parts (NYSE:GPC), and O’Reilly Automotive (NASDAQ:ORLY) often avoid the intense price pressure faced by other types of retailers.
AAP Successfully Competes Online
These auto parts companies have managed to maintain a moat against Amazon (NASDAQ:AMZN). Fears of competition from Amazon sent AAP stock from almost $200 per share in 2015 to just above $80 per share in late 2017. Advance Auto and its peers fought back, and as a result, Advance Auto has built a competitive advantage for itself.
Advance Auto has given itself a leg up by partnering with Walmart (NYSE:WMT). This deal embeds Advance Auto Part on the Walmart website, allowing AAP to draw from Walmart’s customer base while increasing the auto parts Walmart can sell. Moreover, like its peers, it offers same-day delivery and has built direct relationships with independent garages.
Now, AAP stock has moved from stagnant profitability to double-digit growth. This fiscal year, analysts expect profits to increase by 29.4%. They expect the double-digit growth to continue next year and for years to come. For 2019, they predict profit growth of 15.7%.
While AAP stock has seen impressive growth, prospective buyers should consider exercising caution. The trailing P/E ratio stands at 24.4. This mirrors averages for both the S&P 500 and for AAP stock itself. Although the move up could continue, another 110% move higher remains unlikely.
Moreover, at least one of AAP’s peers may offer a better value proposition.
Analysts predict Genuine Parts will maintain double-digit profit growth on average for the next five years. While the growth in GPC stock may come in somewhat more slowly, new buyers will pay a lower multiple of 17.5. Furthermore, they will receive an annual dividend of $2.88 per share. This translates to a yield of just under 3%. Also, GPC stock has increased this dividend for 61 consecutive years. This compares with AAP stock which does not increase and yields only 0.14%.
For these reasons, I would choose GPC stock over AAP at this time.
Final thoughts on AAP stock
Given the recent run-up in AAP stock and its current valuations, new buyers of the equity will see less opportunity to enjoy stock price growth. Advance Auto Parts has experienced an impressive turnaround. It has found itself but a steady but competitive industry with stagnant profits.
A series of deals has bolstered AAP’s competitive moat against Amazon and taken its profit growth into the double digits. However, this growth has also brought with it an increased stock price. I believe AAP stock will eventually become one of the better investments in the industry. However, at this time, GPC stock has become the better buy.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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