Shares of Advanced auto parts (NYSE: AAP) After – just wait – the company lowered its expectations for the rest of the year. The company sees yousure demand, especially for its DIY customers as inflation continues to push consumers to delay discretionary purchases.
It didn’t help that the auto parts retailer reported earnings on what would be a volatile week for stocks. Sure enough, as I write this article, AAP stock is down more than 13% this week. This brings the stock within 10% of the 52-week low it reached in June 2022.
We’re not advocating market timing, so I’m just conceding that AAP stocks may need to fall even further. But if you’re willing to go long, there are signs that Advance Auto Parts could offer investors an opportunity.
Demand is likely to remain stable
The latest economic data shows that new car prices continue to rise year on year. On the one hand, this shows that the pent-up demand for all kinds of vehicles is still strong. But there are several reasons why this only tells part of the story.
- Rising prices for new cars make a new car inaccessible to people below a certain income threshold.
- Used car prices, while not at their peak, remain at historically high levels.
- Rising interest rates will make the price of financing a car less attractive and can effectively price lower income individuals out of the market.
The advantage is that many customers have financial incentives to keep and maintain their existing vehicle.
Delivering parts at the right time
That brings up another point. Today’s vehicles are becoming increasingly complex for the do-it-yourselfer to repair themselves. But Advance Auto Parts also does a lot of business with professional installers. And the company’s growing presence makes it an option for these companies to get the parts they need on time, often the same day.
What drives this point even more is that the company continues to open new locations. The company announced that it opened 78 new stores in the second quarter. That keeps the company on track to meet its goal of opening between 125 and 150 stores by 2022.
Analysts are lowering their price targets, but…
Like clockwork, the analyst community began lowering their price targets for AAP stocks after the company lowered its forecast. But all price targets are still well above the stock’s current price. In fact, the analysts followed by MarketBeat give AAP stock a consensus price target of $235, which is a 33% increase from current levels.
And even if AAP stocks don’t soar as high, investors can still benefit from a juicy dividend. The return is up to 3.40% and the annual payout is calculated at $6 per share on an annual basis. The dividend is supported by the company’s free cash flow (FCF). The FCF fell 84% year-on-year in the first half. However, the past two years are likely to be outliers in terms of the company’s free cash flow. And the company expects that number to improve in the second half of the year.
AAP stocks are a solid choice for value investors
At a price of about $176 at the time of writing, AAP stock has a price-to-earnings ratio of 11.78, suggesting the stock may be undervalued. The company’s key DIY customers may still face headwinds in 2023 from inflation and a slowing economy. However, investors willing to go long can benefit from a company that is growing and showing strong operating margins. Add in a juicy dividend and the stock seems like a strong choice for value investors.