Advanced Auto Parts has the right parts for this economy

Posted May 19th 2009 4:40PM by Joseph Lazzaro
Filed under: Stocks to Buy

Without question, this market remains a stock picker's market. Select the wrong stock, and there's a 30-40% haircut up ahead; select the correct stock, and you're positioned for the recovery with modest downside exposure. For a chance at the latter, consider Advanced Auto Parts (NYSE: AAP).

There are no 'sweet' sectors in this market, but an argument can be made that auto repair represents one of the best. The increase in the average U.S. vehicle age, less-than-ideal credit conditions for new car purchases, and a recession that's created the era of the 'frugal consumer,' all bode well for AAP, for an obvious reason: more Americans will have to keep that used car in good running condition because a new one probably is not their immediate future.

Another positive for AAP: the moderation in gasoline prices, which should put more disposable income in consumers' pockets than last year; that historically has led to increased vehicle maintenance. The First Call F2009 / F2010 EPS estimates for AAP are $2.81 / $3.10.

In general, analysts see a 5-7% sales increase for AAP in F2009, following a nice 4.8% increase in F2008. Further, the company's plan to add 30 news stores per year onto its 40-state 3,215-store network is adequate; there is more than enough room in the U.S. to add stores and increase market share.

Risks to the company's operation include any sudden, sustained surge of Americans into new car showrooms: don't look for that to happen any time soon.

Stock Analysis: Advanced Automotive Parts is a moderate-risk stock. Consider buying a 25% position in AAP now; then buy another 25% in three months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your AAP position in the first half of 2009. Sell / Stop Loss if you were to buy shares in this company: $22.

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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: AAP, Advanced Auto Parts, inthenews