Advance Auto Parts (NYSE:AAP) reported strong earnings on Tuesday, November 10. But the auto parts manufacturer is not getting much love from investors. After climbing to a year-to-date high of $162.56 in advance of its report, AAP stock has dropped nearly 5% prior to Wednesday’s trading session.
So why all the gloom? Some of may simply be that investors are robbing from Peter to buy Paul. With so many sectors coming back to life on just the whiff of a Covid-19 vaccine, it’s possible that investors took a quick profit off of Advanced Auto Parts and put in other sectors.
The larger point I’m making is that analysts are generally upbeat about the stock and nothing in the earnings report should change that narrative. In fact, Thomas Hughes sees a bullish technical outlook for AAP stock.
The company reported adjusted earnings per share EPS of $2.81 on revenue of $2.54 billion. Both of those numbers were higher from the prior quarter as well as on a year-over-year basis. And on the all-important same-store sales metric, AAP scored a big win. Same-store sales were over 10% higher (10.2%) which the company said on its conference call was the strongest rate in 15 years.
So what should investors expect from Advance Auto Parts to close out the year?
A Reason to Buy
The auto parts category was an early pandemic winner. As more people spent time at home, working on their car was a way to pass time. And Advanced Auto Parts along with chains like AutoZone (NYSE:AZO) capitalized on the trend toward an omnichannel model and delivered for its customers.
That trend stalled out a bit as more customers worked on their car, but had no reason to drive them. With the announcement of a vaccine, that may be changing. No the vaccine won’t change things overnight. And it may still be well into 2021 before many office workers are back on their daily commute. But, there’s optimism. Recent analyst forecasts are projecting that optimism with aggressive price targets that would take AAP stock approximately 20% above its current level.
Also, the company pointed out on its call that more consumers were purchasing used cars versus new cars. This is also a potential catalyst for the stock.
A Reason to Sell
Despite the optimism surrounding a Covid-19 vaccine, the specter of a lockdown of some variety remains priced into the stock. That may be one reason the company was reluctant to reinstate full-year financial forecasts. This was something that analysts tended to give a pass to in prior quarters, but now are beginning to view with skepticism.
And in this case, the skepticism may be warranted. The auto parts sector is already under pressure due to the increase in unemployment. Although this number has come down in recent months, businesses are facing a high degree of uncertainty not only due to the virus, but due to the incoming change in administrations in Washington, D.C.
The Bottom Line on Advance Auto Parts
If you’re a fan of technical analysis, then Advance Auto Parts certainly looks like a buy. However, there are reasons to like the stock on a fundamental level as well. And investors are able to get a dividend for owning the stock.
With all of that said, there’s a reason investors sell a stock after it reports higher earnings. And while I alluded to the fact that there may be absolutely no reason for investors to be concerned, I might wait to see confirmation of the stock’s technical path before I jumped in. AAP stock has been a cyclical performer over the past five years so I’m not sure how much value there is in chasing a possible movement higher.
Right now, I lean towards the analysts and give the stock a hold.
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