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

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

While management’s strategy appears sound, AAP’s historical underperformance and multiple past turnaround attempts warrant caution, BMO analysts said in a note.

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

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

The plan also targets over 100 new stores annually and a 7% operating margin by FY27. However, these goals fall short of key competitors AutoZone Inc (NYSE:AZO) (AZO) and O’Reilly Automotive Inc (NASDAQ:ORLY) (ORLY), which boast operating margins near 20%, analysts said.

Sales have softened in 2024 due to adverse weather, hurricanes, and economic pressures impacting consumer spending. However, these headwinds are seen as temporary, with long-term trends in AAP’s favor, according to BMO analysts.

While electric vehicle (EV) adoption has been a concern in the auto service sector, its near-term impact remains limited. Even with accelerated EV growth, their share of the vehicle market is expected to stay small over the next few years, the brokerage said.

AAP’s valuation appears fair. Despite its potential, the company’s turnaround efforts must yield tangible results before BMO upgrades its outlook, analysts said.

AAP’s focus on operational improvement and favorable industry dynamics are promising, but execution risks and competitive pressures remain key watchpoints, BMO analysts added.