Tune-Up Your Portfolio With Advance Auto Parts Ahead of Earnings

Advance Auto shares should accelerate higher, driven by its operational improvements.
By Richard Saintvilus ,

Waiting for shares of auto parts retailers to slow down has cost investors tons of money. This is especially true when considering the sustained momentum in auto sales, which are still at decade highs. Advance Auto Parts (AAP) - Get Report has been one of the beneficiaries of the auto boom. Its shares are up some 22% on the year to date and 34% in twelve months, crushing the SPDR S&P Retail ETF (XRT) - Get Report , which is down more than 5% so far in 2015.

Headquartered in Roanoke, Va., Advance Auto Parts, the second-largest auto parts retailer in the U.S. by revenue, reports third-quarter earnings before the opening bell Thursday. Unlike big-box retailers that specialize in electronics or apparel, auto parts is one area seemingly immune to the dominance of Amazon.com (AMZN) - Get Report . Shares of competitors like AutoZone (AZO) - Get Report (up 27% in 2015) and O'Reilly Automotive (ORLY) - Get Report (up 41% in 2015) both trade near all-time highs.

Advance Auto is operating on all cylinders. In the second quarter, for instance, not only did Advance Auto increase its gross profit rate by 31 basis points to 45.9%, it grew its comparable operating margin rate 50 basis points to 10.1%. Both of these metrics imply management is pushing all of the right buttons in terms of operational efficiency.

Advance Auto -- by reducing second-quarter operating expenses by 26 basis points -- is cutting some fat out of its business. This allows more of its revenue, which reached $2.37 billion in the second quarter, to turn into profits. From my vantage point, it would be a mistake to sell a winner like Advanced Auto, with analysts' consensus estimates for the just-ended quarter and full-year racing ahead of Thursday's results.

For the quarter that ended September, the average analyst earning-per-share (EPS) estimate calls for $2.09 a share on revenue of $2.33 billion, translating to year-over-year increases of 10.5% and 1.6%, respectively. Just in the past 30 days, the EPS has climbed by a penny and has climbed 3 cents since the start of the quarter.

Likewise, full-year EPS has climbed a penny in the past 30 days to $8.28 a share, suggesting a 7% increase from the year-ago quarter. Full-year revenue, meanwhile, is projected to be $9.85 billion, which would be flat year over year. That Advance Auto can still make money on projected flat revenue underscores the focus management has placed on profitability and operational efficiency.

And here's the thing: 2016, where consensus EPS estimates calls for $9.82 a share, is setting up to be even better. This would mark an almost 20% year over year increase in earnings. So, while the shares are seemingly pricey at near all-time highs, Advance Auto shares should accelerate higher, driven by its own operational improvements.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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