Tag: Continued

Advance Auto Parts Stock: Old Vehicles Require Continued Maintenance (NYSE:AAP)

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Advance Auto Parts, Inc. (NYSE:AAP) is a leading automotive aftermarket parts provider in North America. The types of products sold by the company include parts & batteries, accessories and chemicals, and engine-related maintenance products, such as air filters and transmission fluid. Their customers include both professionals and DIYers. As of December 31, 2021, sales to professionals accounted for nearly 60% of total net sales.

As an aftermarket parts supplier, AAP benefits from providing automotive solutions to older vehicles that need more continuous repairs & maintenance. In the current market environment, AAP is poised to benefit from widespread affordability constraints of purchasing a vehicle.

In May 2022, the average new-vehicle transaction price is expected to reach nearly +$45K, which would be up 16% from 2021. Prices for used cars offer no better alternative, with prices up nearly 30% from January 2021. As such, there is a greater likelihood of individuals holding onto their cars for as long as they can. In fact, the average age of vehicles on U.S. roadways reached a record high of 12.2 years in 2021. For AAP, this means increased demand for brakes and brake pads, batteries, tires, and other accessories.

AAP also benefits as total vehicle miles traveled increases. In 2019, total miles driven reached 3.26T, before plummeting to 2.83T during the height of the COVID-19 pandemic. The data has since improved and is now at or near 2019 levels. With increased travel comes greater maintenance requirements.

U.S. Federal Highway Administration, Moving 12-Month Total Vehicle Miles Traveled [M12MTVUSM227NFWA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/M12MTVUSM227NFWA, May 28, 2022.

U.S. Federal Highway Administration, Moving 12-Month Total Vehicle Miles Traveled [M12MTVUSM227NFWA], retrieved from FRED, Federal Reserve Bank of St. Louis

With the wind at their back from an aging vehicle fleet and total miles driven, one would not expect AAP to be underperforming the broader market. Yet, AAP is down nearly 20% YTD, which is worse than the S&P’s 13% decline over the same period. For investors seeking an under-the-radar play in the automotive sector, AAP is one name worth extra attention.

Earnings Review and Other Reportable Events

In the first quarter ended April 23, 2022, AAP reported total net sales of +$3.4B, which was up 1.3% from the same period last year, but +$20M short of estimates.

Through the first ten weeks of the year, AAP had a strong start, with YTD comparable store sales up mid-single digits. The final six weeks, however, came under pressure from flagging DIY sales, resulting in mid-single digit declines in comparable sales.

Weighing on the DIY comparisons were the impacts of economic stimulus payments in the prior year and a slower start in the current period, especially in the northern regions, due to colder and wetter weather patterns.

Despite weakness in DIY, overall comparable store sales were up 0.6% from the prior year and 25.3% on a two-year basis. The increase represented the 8th consecutive quarter of comparable store sales growth. Likewise, both adjusted operating income and adjusted EPS grew for the 8th straight quarter.

Gross profit margins came in at 44.6%, which was

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Nvidia Stock: Auto Business May Drive Continued Performance (NASDAQ:NVDA)

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David Becker/Getty Images News

NVIDIA (NVDA) has been on an incredible run of late, fueled by tremendous growth across its business segments. Revenue has more than doubled over the past 3 years, resulting in explosive economies of scale. Gross margins are up nearly 500 basis points while operating margins are up over 900 basis points. Free cash flow has increased by 2.3 times over that span.

NVDA growth and margin expansion

NVDA (NVDA Investor Presentation)

While the business itself is clearly very strong and growth momentum is impressive, the expected slowdown in growth and the premium valuation multiples attached to the stock – even after the recent pullback in the share price – imply that it is not a Buy at the moment. On the other hand, the explosive growth potential in the automotive business could be an x-factor that drives continued outperformance for the company. In this article, we will overview the business as a whole and then discuss the qualitative aspects of the automotive business that indicate massive growth could materialize there.

NVDA Stock Has A Wide Moat Business Model

Even more importantly, the company possesses a wide moat due to its intellectual property. Thanks to its leading position in the GPU space, the company plays an integral and increasingly prominent role in the global economy.

As the leader in the space, NVDA is able to attract among the very best talent in the industry that it retains through generous compensation packages and a large research and development budget. In our view, this positions the company to retain its technical edge in the industry and continue to innovate to compound its intellectual property driven competitive advantages. This makes the business model fairly low risk and gives it tremendous long-term potential. We also see this competitive advantage on display in its superior profitability metrics compared to its rival Intel (INTC):

Nvidia vs Intel: return on equity and return on invested capital
Data by YCharts

NVDA Stock Has A Massive Growth Runway

Thanks to its world-class brain trust, strong base in technology and basic research, and strong macro tailwinds for its industry, NVDA has nearly limitless opportunities to grow. The company has already begun expanding into new markets, including data centers and autonomous driving:

NVDA Investor Presentation

NVDA (Investor Presentation)

These initiatives have already gained substantial momentum as its data center business saw 53% year-over-year growth in the first nine months of 2021 and its automotive business saw 13% year-over-year growth in the first nine months of 2021.

Meanwhile, its core gaming business soared by 72% year-over-year and its professional visualization business was its fastest-growing business, up 97% year-over-year, though it is still dwarfed in size by its gaming and data center businesses.

Long term, the data center and the automotive businesses should see significant sustained growth as both markets are massive and set to grow for many years to come. With artificial intelligence technologies exploding as well as the metaverse just beginning to take off, NVDA has enormous potential to increase the applications of and markets for its technologies.

One way in which NVDA has been aggressively pursuing

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