5 Charts To Show The Value Of This Hedge Fund Darling

| About: Advance Auto (AAP)

Advance Auto Parts, Inc. (NYSE:AAP) is an auto parts and accessories retailer. The company operates primarily in the Northeastern, Southeastern and Midwestern States. It also has a few stores in Puerto Rico and the Virgin Islands.

The company has a market cap of about ~$6 Billion, revenues of $ 6.35 Billion and net income has been growing with an average of 19.55% over the past ten years. It is currently very attractively valued, given the results the company managed over the past ten years.

AAP PE Ratio TTM Chart
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AAP PE Ratio TTM data by YCharts

Competition and Valuation

In a highly fragmented market AutoZone Inc (NYSE:AZO) and O'Reilly (NASDAQ:ORLY) are the two most important competitors. Unfortunately they are also both larger then Advanced Auto Parts. Where AutoZone and O'Reilly have chosen to apply themselves to DIY or DIFM, Autoparts approaches the market both ways.

On a P/E basis alone Advanced Auto Parts is clearly cheaper than O'Reilly but trades at a similar multiple to AutoZone. AutoZone is the larger firm and benefits more from economies of scale. On the other hand Advanced Auto Parts is very concentrated in a few regions, which helps to keep up margins.

AAP Return on Equity Chart
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AAP Return on Equity data by YCharts

Return on Equity

One of the most attractive metrics of any investment is its return on equity. AAP really brings the bacon home. The firm just managed terrific returns on equity over the past five years. This helps my confidence in management. It also makes them a highly attractive company to acquire, amongst other reasons.

AAP Free Cash Flow TTM Chart
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AAP Free Cash Flow TTM data by YCharts

Free Cash Flow

Although this was already clear from the return on equity charts, free cash flow has been developing in the right direction ever since 2007. This cash flow is the main attraction. Earlier this year rumors circled that private equity was interested in AAP. Apparently the price the firm would have had to pay was too high but with the stock price down even more and lagging the market, perhaps there is renewed interest.

AAP Total Long Term Debt Chart
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AAP Total Long Term Debt data by YCharts

Long Term Debt

Long term debt is quite manageable. If you compare its development to the free cash flow this is even more clear. Also compared to the competition the firm carries less debt. Even though it appears so in the Ycharts AutoZone debt went to 0. The latest quarterly report still shows $ 4 billion.

AAP Cash and Equivalents Annual Per Share Chart
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AAP Cash and Equivalents Annual Per Share data by YCharts


The firm is hoarding cash at the moment. From a perspective of how much you are actually getting for the price of a share that's a good thing. Recently the firm acquired BWP at $180 million. And from comments of the CFO at the latest earnings call it's possible further acquisitions are about to be announced.

As our industry continues to consolidate, we believe there maybe opportunities which will enable us to drive profitable growth and value creation, particularly in the commercial space. As we evaluate these opportunities, we are focused on driving attractive financial returns like we have achieved with our recent acquisition of BWP, which year-to-date has added $0.04 per share to our earnings.

With this context, year-to-date, we have deployed over $250 million of capital in a manner consistent with our priorities. This includes investing approximately $180 million in our acquisition of BWP and returning approximately $75 million to shareholders via share repurchases, including $15.7 million in our second quarter.

At the end of the quarter, we had roughly $418 million left under our share repurchase authorization, and our average diluted share count was 73.3 million shares. As we have said before, we take a long-term view and look beyond individual quarters in making our capital allocation decisions as we balance investment opportunities against returning capital to shareholders.

Ultimately, our focus is on maximizing long-term value to shareholders in a manner consistent with our capital allocation priorities. And to that end, we do not intend to maintain our current levels of excess cash beyond the short to medium term.

Acquisitions are not my preferred way for companies to spend cash but given the results over the past years, I have to give management some credit.

The best thing that could happen is for management to decide to raise the dividend by a meaningful amount. I don't think the chances of that happening are very high.

Hedge Fund Darling

It's not really an ideal fundamental to base an investment on but there are no fewer than 52 hedgefunds invested in Advanced Auto Parts. Investors include such big names as Jim Simons, Cliff Asness, Steven Cohen, D.E.Shaw, Mario Gabelli, Bill Miller and Ricky Sandler. A few of them hold options which may indicate speculation on some kind of event.


On may 3 2013 I wrote the article 6 reasons to buy Advance Auto Parts, for the most parts these are still valid. Except it is now $4 a share to cheaper to acquire.

A takeover or buyout is still a possibility but unfortunately it is also a danger as management may lever up and go on an acquisition streak itself.

Given the companies track record I think it's an attractive holding even for longer periods of time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.