November 17, 2023 - 11:34am EST by
2023 2024
Price: 49.70 EPS 2.92 4.05
Shares Out. (in M): 59 P/E 17x 12.5x
Market Cap (in $M): 2,950 P/FCF 16x 8x
Net Debt (in $M): 3,852 EBIT 420 750
TEV (in $M): 6,802 TEV/EBIT 16x 9x

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AAP is orphaned and super cheap vs its historical financial performance.  Yes, AAP is a problem child.  Let's not compare it to AZO/ORLY... doing so is irrelevant to this thesis.


Point #1 - delivering close to historical profitability implies strong value creation from this price

Ballpark, historical UFCF margin at AAP has been 3-6.5% excluding nwc moves (see financials below).  If we assume they are awake at the wheel and can achieve that range of UFCF, it implies a LFCF to us of 9-22%.  That's pretty cheap for the red-headed third child of an oligopoly.  DIY and DIFM auto parts retailing is a stable, growing industry with three healthy public peers.  AAP has it's problems, but this view on FCF yield at least pays us while we wait.  


Point #2 - New management will invigorate the bull case

We think New CEO Shane O'Kelly from HD Supply and new CFO from Lowes have an excellent chance of recovering AAP's operations to historical levels in 2024.  Selling Worldpac and the Canadian business should be highly accretive at this depressed valuation.  AAP historically trades at ~1.0-1.2x revenue based on the FCF margins just discussed.  At today's price, it's at 0.60x, so monetizing the good assets at probably above 1.2x revenue, is going to improve the balance sheet and probably enable immediate buybacks.

EV / Revenue multiples


Point #3 - AAP's demise is being overstated

We think AAP's shareholder base is exhausted and the new managemnet team hasn't had a chance to outline their bull case yet.  We think this collection of assets is still worth 1.0-1.2x revenue in aggregate.  If that is correct, the stock should be worth over $125/sh.  It matters not how we get there, but mgmt and the Board have all the pieces in motion...  and they *should* produce a healthy FCF yield and low growth while we wait.

AAP is not overleveraged as we think ntm interest coverage with UFCF is >4x, they just reinstated the dividend, and they will be overcapitalized once they sell Worldpact and the Canada biz.  Buybacks incoming.


Point #4 - there's a big prize for improving AAP

There has got to be an operator out there that looks at AAP's EV/Rev vs AZO/ORLY's and see how many multiples they can make from improving AAP just a bit.

That's not nothing.  Someone should want to try and go private at this valuation.  Surely it would be more palatable after the coming divestitures.




continued operational disappointment

can we use the term shitco on here?  perpetual share losers end up shrinking, right?  that's possible here, though we think unlikely

I know this company is a dog, but is it imploding?  What are we missing? 



EV / EBITDA multiples

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


- realization of asset sales

- healthy margin & FCF guidance for the core box business in 2024/2025

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