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Advance Auto Parts: BMO starts coverage with 'sector perform', says valuation fair

investing.com 13/12/2024 - 06:38 AM

Advance Auto Parts Inc Coverage Initiated by BMO Capital Markets

BMO Capital Markets has begun coverage of Advance Auto Parts Inc (NYSE:AAP) with a “Market Perform” rating, citing the company’s early-stage turnaround as a reason for a wait-and-see stance.

While management's strategy seems sound, AAP’s historical underperformance and multiple past turnaround attempts warrant caution, according to BMO analysts in a note.

BMO has set a price target of $45 for Advance Auto Parts.

AAP’s new strategy, following the sale of its Worldpac business, includes exiting the West Coast market and focuses on streamlining distribution centers, improving store operations, merchandising, and supply chains, as noted by BMO analysts.

The plan aims for over 100 new stores annually and a 7% operating margin by FY27. However, these goals fall short when compared to major competitors like AutoZone Inc (NYSE:AZO) and O’Reilly Automotive Inc (NASDAQ:ORLY), which feature operating margins nearing 20%, analysts reported.

Sales have softened in 2024 due to adverse weather conditions, hurricanes, and economic pressures affecting consumer spending. Nevertheless, these headwinds are viewed as temporary, with long-term trends appearing favorable for AAP, according to BMO analysts.

Concerns regarding electric vehicle (EV) adoption have arisen in the auto service sector, although its near-term impact remains minimal. The brokerage states that, even with accelerated EV growth, their market share in the vehicle segment is expected to stay small over the next few years.

AAP’s valuation is considered fair. However, the company’s turnaround efforts need to produce tangible results before BMO will consider upgrading its outlook, the analysts advised.

While AAP’s focus on operational improvements and favorable industry conditions is promising, execution risks and competitive pressures remain key areas to monitor, BMO analysts concluded.




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