3Q miss! Disappointing Comps! 26% decline in last month! Is there nothing but doom and gloom in the future for Advance Shareholders? With a plethora of disappointments investors are left with lots of questions and a lack of answers.
While there is no question that 3Q was disappointing and a step back for company. Compared to peers such as O'Rielly automotive the firm seems to be running on fumes. However Advance has the assets to keep pace and given this weakness provides a terrific buying opportunity.
Management Shake-Up:
On Nov. 12, 2015 the firm issued a press release announcing the Jeff Smith of Starboard Value joined the board, Starboard will designate 2 independent directors, and Advance Auto Parts will also name 2 independent directors to the board. Combining the search for a new CEO already underway and the presence of an activist investor acting as a watchdog is enough of a catalyst that shall result in an utterly different firm this time next year.
Valuation:
My belief is that Advance Auto Parts Inc. is actually worth $178 using a conservative 10x EV/EBIT multiple. Assuming a 1% decline in Sales YoY for our FY15 and a conservative 10% Operating Margin this represents a 13% premium to Wednesday's closing price of $157.93.
The story doesn't end there either! Management is aiming to add 200 basis point to OM in order to reach 12% in 2016. Given the weakness in 3Q numbers there is a high probability that this is not in the cards. Rather giving them a modest 50 basis improvement YoY and sales growth flat YoY, apply the same 10x multiple there is 28% upside to target of $202 per share!
In summary, recent weakness is overblown and a result of investors heading for the exits due to a number of factors ranging from stock specific to macro. This provides a great entry to buy a company with great assets and a motivated management to realize that value for shareholders.