Investor Soup's  Instablog

It is hard to argue with the assumption that companies like Advance Auto Parts are benefitting from the bad news in the auto industry.  With 3,423 stores, at last count, they are a likely destination for the do-it-yourselfer and small garage mechanic.  Just like Pep Boys (which I wrote about over a month ago), Advance Auto Parts has seen its stock climb significantly over the past 6 months making it onto several "hot stock" lists.

Several positive things stand out about Advance Auto Parts: 

• They are profitable both on a quarterly and annual basis.  In the first quarter of 2009 ended April 29th. revenues increased 10.3% over the prior year's quarter.  Earnings rose 14% to $94MM.  Earnings per share increased 13 cents to 98 cents over same period.
• Moody's recently lifted its debt rating on Advance Auto Parts.  They cited Advance's solid operating cash flow, which the ratings agency said should be more than sufficient to meet all working capital and capital expenditure requirements, with only minimal usage expected under a $750 million unsecured revolving credit line.
• Institutions own an amazing 98% of the shares in the company and sales have been minor.  That is, in an of itself, amazing.  So many instutiions have fire-saled shares of portolio companies for liquidity purposes, the lack of sales activity by institutions of Advance's shares seems to almost be an endorsement.

Some things to watch:

• The chart seems to indicate that Advance Auto Parts might be ready to "take a breather".  In the last few days, the stock has fallen off from its 52-week high on July 30th, 2009 of $47.41 to around $45.  The stock has increased over 40% in 2009 alone.
• The Stochastics and RSI are on the decline indicating distribution and, I would surmise, profit taking.
• The MACD has turned bearish with the signal line crossing over the MACD line.

The other concern that I have about Advance is its cash and liquidity.  Even though Moody's lifted the outlook on their debt and they have untapped borrowing capacity under their revolving line, I am concerned to see that they only have $51MM in cash.  Operating margins in Advanced's business are very tight (typically below 10%).  Any erosion in margins or slow turns on inventory could negatively affect their ability to cover debt service.  With a quick ratio of .09:1 (the books say a 1:1 is the optimal ratio) the company has very poor liquidity.
Advance Auto Parts is still a company that is a "Buy" to me.  They may continue to pull back in the near term, but the long-term prospects look posiitive.  The cash position has increased 4 quarters in a row and with the uplift in debt rating, Advance Auto Parts looks like a keeper.

Disclosure:  No positions