Advance Auto Parts Undervalued

We plan to lift our $177 per share valuation for narrow moat

We still believe Advance offers investors the best opportunity to capitalize on attractive industry dynamics and suspect our valuation embeds a more optimistic take on the firm’s ability to close performance gaps relative to its peers than prevailing sentiment. Although we anticipate 2017 will be a transition year, with low-single-digit top line growth and only modest profitability gains, we see current trading prices as offering a sufficient margin of safety for patient investors.

That said, we anticipate remaining more reserved regarding Advance’s 2017-21 margin expansion prospects than management’s 500 basis point goal until the operational improvement plan starts to deliver more concrete results. While we expect vigilance on costs and leverage should boost profitability, we expect Advance will need to spend to optimize its supply chain, regain customers, and improve service. Consequently, we continue to anticipate around 300-350 basis points of pickup by 2021.

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