NEW YORK (TheStreet) -- Shares of Advance Auto Parts (AAP) - Get Report are gaining by 6.45% to $181.50 in pre-market trading on Wednesday, after activist investor Starboard Value bought a 3.7% stake in the company, the Wall Street Journal reports.
The hedge fund is encouraging the automotive replacement part retailer to improve margins to achieve a value potentially above $360 per share, according to the Journal.
Starboard believes that although Advance Auto stock has gained more than the S&P 500 that it joined in July, with the company's shares rising 7% this year, with regard to profit margins it lags behind competitors AutoZone (AZO) - Get Report , which is up 17%, and O'Reilly Automotive (ORLY) - Get Report ,which is up 26%, the Journal notes.
Starboard is urging the company to heighten its focus on business-to-business sales and improve its distribution to service stations to improve its sales, the Journal adds.
The activist's stake, worth more than $460 million at Tuesday's close, will make Starboard one of the top 10 investors in Advance Auto, according to the Journal.
Separately, TheStreet Ratings team rates ADVANCE AUTO PARTS INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:
We rate ADVANCE AUTO PARTS INC (AAP) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, growth in earnings per share, revenue growth, expanding profit margins and largely solid financial position with reasonable debt levels by most measures. We feel its strengths outweigh the fact that the company has had somewhat disappointing return on equity.
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 33.82% over the past year, a rise that has exceeded that of the S&P 500 Index. Turning to the future, naturally, any stock can fall in a major bear market. However, in almost any other environment, the stock should continue to move higher despite the fact that it has already enjoyed nice gains in the past year.
- ADVANCE AUTO PARTS INC has improved earnings per share by 7.4% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, ADVANCE AUTO PARTS INC increased its bottom line by earning $6.71 versus $5.33 in the prior year. This year, the market expects an improvement in earnings ($8.30 versus $6.71).
- Despite its growing revenue, the company underperformed as compared with the industry average of 10.0%. Since the same quarter one year prior, revenues slightly increased by 0.9%. Growth in the company's revenue appears to have helped boost the earnings per share.
- 48.52% is the gross profit margin for ADVANCE AUTO PARTS INC which we consider to be strong. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 6.32% trails the industry average.
- The debt-to-equity ratio is somewhat low, currently at 0.64, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.20 is very weak and demonstrates a lack of ability to pay short-term obligations.
- You can view the full analysis from the report here: AAP