Advance Auto Earnings: Disappointing Period Suggests More Turnaround Work Ahead; Sector Still Solid

Our $191 fair value estimate for narrow-moat Advance Auto Parts should fall by a high-single-digit percentage in the wake of disappointing first-quarter results and a per-share dividend cut to $0.25 per quarter from $1.50. However, we do not believe the results are as much of a disaster as the shares’ 30%-plus postearnings plunge might suggest. We see the challenges Advance faced in the period (most notably, larger-than-expected price cuts in the professional segment) as idiosyncratic, with the sector’s favorable traits intact. While it will take time to right the ship, we believe our long-term forecast for Advance (mid-single-digit top-line growth and low-double-digit operating margins over the next decade) is sufficiently conservative.