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This $2.4 Billion Company Is About to Get a $1.2 Billion Payday. Here's Why I Couldn't Be More Optimistic
AAPAdvance Auto Parts(AAP) The Motley Fool·2024-10-19 16:02

Core Viewpoint - Advance Auto Parts is undergoing a significant turnaround plan, bolstered by a 1.2billioncashinfluxfromthesaleofitsWorldpacbusiness,whichisexpectedtoenhanceitsfinancialflexibilityandoperationalefficiency[1][2][4].Group1:CompanyOverview−AdvanceAutoPartshasamarketcapitalizationof1.2 billion cash influx from the sale of its Worldpac business, which is expected to enhance its financial flexibility and operational efficiency [1][2][4]. Group 1: Company Overview - Advance Auto Parts has a market capitalization of 2.4 billion, significantly smaller than competitors Autozone and O'Reilly, which have market caps of 53billionand53 billion and 71 billion respectively [1]. - Advance operates nearly 4,800 locations, while Autozone and O'Reilly have approximately 7,400 and 6,200 locations respectively, indicating that the size disparity does not fully justify the market valuation differences [1]. Group 2: Financial Transactions - Advance sold its Worldpac business for 1.5billion,nettingapproximately1.5 billion, netting approximately 1.2 billion after transaction expenses, which is about half of its current market cap [2]. - Worldpac generated 2.1billionintrailing−12−monthrevenueand2.1 billion in trailing-12-month revenue and 100 million in EBITDA, leading to a sales price of 0.7 times its sales and 15 times its EBITDA [2]. Group 3: Performance Metrics - Advance's stock trades at 0.2 times sales and about 7 times EBITDA, indicating that the sale of Worldpac was at a premium compared to its current stock valuation [3]. - Over the past decade, Advance has averaged an operating margin of about 6%, significantly lower than Autozone and O'Reilly, which have maintained margins between 18% and 20% [4]. Group 4: Strategic Changes - The new CEO, Shane O'Kelly, is focusing on restructuring the supply chain to address profitability issues, which is seen as crucial for improving returns for shareholders [5][6]. - If Advance can achieve a 10% operating margin, it could generate close to 1billioninannualprofits,withpotentialforthestocktoquadrupleinvalueifvaluedat10timesitsoperatingprofit[5].Group5:FinancialPosition−Advancehasapproximately1 billion in annual profits, with potential for the stock to quadruple in value if valued at 10 times its operating profit [5]. Group 5: Financial Position - Advance has approximately 1.8 billion in long-term debt and less than $500 million in cash and equivalents, indicating a challenging net-debt position [6]. - The sale of Worldpac is expected to improve Advance's balance sheet and provide management with the necessary flexibility to make strategic decisions for long-term success [6].