Barron's Says Advance Auto Parts Stock Overvalued

NEW YORK, June 29, 2003; Reuters reported that shares of Advance Auto Parts Inc. could fall 20 percent or more, according to an article in Barron's that said the prospects for the No. 2 U.S. parts retailer may not justify the recent run-up in its stock.

Shares closed at $60.24, up 24 cents, in Friday New York Stock Exchange trade. Since hitting a low of $36.99 in February, the stock has risen 83 percent.

Advance Auto's share price may be overvalued, Barron's Vito Racanelli wrote in the issue dated June 30.

Excluding one-time items, the market values Advance Auto at 20 times earnings, compared with industry leader AutoZone's multiple of 15, according to the article, titled "Kicking the Tires."

AutoZone's annual retail sales per square foot rose 10 percent over the past five years, while Advance Auto's have been essentially flat, Barron's reported.

While Advance Auto is betting on 5 percent growth in sales at stores open at least a year, Barron's wrote that growth dropped to 1 percent in the first quarter from 8 percent a year earlier.

An Advance Auto spokeswoman said the rise in the stock price is the result of the company's ability to boost operating margins. In the first quarter, operating margin rose 1.6 percentage points to 7.5 percent, and the company is aiming to raise that figure to 11 percent in the next four to five years.

The article also raises questions about Advance Auto's accounting, following the acquisition of Discount Auto Parts in late 2001.

"The company's complicated accounting makes it difficult to value the shares with confidence," the article said. "Acquisitions have led to a haze of extraordinary charges, with pro-forma based earnings juxtaposed against much lower results based on generally accepted accounting principles."

The article quotes Advance Auto's president as saying that the company took a one-time first quarter charge for debt reductions and that integration expenses will end after this year.

The article also says the company is more leveraged than it appears. While its debt-to-capital ratio is 60 percent, including lease obligations, its ratio increased to 78 percent.

Advance Auto was pleased with its 15.1 percent return on invested capital, including the lease obligations, on a trailing 12-month basis from the first quarter of 2003, the spokeswoman said. Last year, its return was 14.3 percent, she said.