Recovering from the global recession, the US auto industry has started to show growth signs in the current fiscal year after facing a sharp decline in demand in prior years. The reason being that US-based companies had to deal with higher fuel prices and inappropriate management strategies, unlike many of their foreign rivals. The decline in sales of light vehicles can be seen in the following graph.
*Until September 2012
Source: Automotive News, Company Annual Reports
Source: Automotive News, Center for Automotive Research
However, the industry demand is now reverting to its normal levels. Despite the fact that the US economy growth is sluggish, growth in the auto industry is steady and promising. Since January 2012 the monthly sales of light vehicles have grown at an annual rate of above 14 million units, except in the month of May. In May 2013, sales increased at an annual rate of 15.3 million, which is up 10% from May 2012.
The factors leading to this improvement include the declining unemployment rate, the historically unprecedented high age of vehicles, reflecting the potential for new demand for vehicles, and the slow decline in interest rates on new vehicles. The average interest rate on new vehicles dropped to 4.36% in the last quarter of FY 2012-13, from 4.52% a year earlier, and the average monthly payment fell to $460 from $468.It has been forecasted that sales will be up by 5% in 2013 compared to 2012.
This growth in the auto industry will also lead to growth in the auto parts industry, as this industry provides products to compliment the auto industry. Advance Auto Parts (NYSE:AAP), a key market player in this industry, will benefit from this growth. The company operates in a highly diversified industry with a high level of rivalry. It deals in four different categories of products: parts, accessories, oil and chemicals for cars. The growth in the auto industry will improve the sales of the accessories, chemicals and oil segments of the company.
Additionally, the high age of vehicles on the roads can boost the sales of auto parts, as older cars need more auto parts to continue running. The chart shows that the average age of vehicles is increasing compared to previous years.
The chart below shows that the deferred maintenance increased in 2012 by a significant number, which will further help the company in boosting sales.
Advance Auto Parts operates in 41 different states and territories, where it has 3,576 outlets. Its outlets are increasing every year, which results in increased revenues.
Financial Performance Analysis
Advance Auto Parts' revenues are increasing at a declining rate. While its profit, net income and operating margins are the same compared to previous years, this shows that an increase in expenses is in synchronization with the increase in revenues.
Although the company has a positive revenue growth, its revenue and net income growth is far less than the industry average. But its operating and net margins are above the industry average, showing that the company is better able to pay its fixed costs and it earns higher profits despite its revenue growth being lower than the industry.
Stock Price Performance
(click to enlarge)Source: YCharts
The chart above represents the percentage change in the stock prices of Advance Auto Parts and its major competitors. According to this chart, the overall industry is performing well as price appreciation compared to previous months can be observed. AAP is demonstrating the second-highest price appreciation, which is slightly below ORLY. The company had faced depreciation in its stock price in January 2013, but then the price elevated, showing that the company has started performing well.
The table depicts a distinction between the AAP's valuation and that of its competitors. The company's price-to-sales ratio is greater than the industry, but its price-to-book and price-to-earnings ratios are very low compared to the industry, demonstrating that the stock is undervalued compared to its close competitors and the overall industry. Based on this, investors have a viable opportunity as the company has growth prospects in the future.
It is expected that AAP will expand its business westward, where it has an opportunity to avail.
The company is projected to open 281 new stores in the next four years, from 2014 to 2018.
Source: Company Financials
The table explains the forecasted revenues, assuming that on average 70 new stores will open per year until 2018, as the company is planning to open 281 new stores. The projected number of stores is equally spread out over the next 4 years. The gross profit, operating profit and net income are forecasted presuming the constant margins of FY12. Based on this table, it is evident that the revenues will continue growing in the next 5 years.
The organization is registering superior performance as it continues to post higher profits versus the industry averages, and is anticipated to earn higher profits in the future as well. It is currently an undervalued company, providing an attractive opportunity for investors to earn a positive return on their investment. Thus, I am making a long-term buy recommendation for this stock.