10-Minute Investment Autopsy No. 4: Advance Auto Parts
I got lucky on Advance Auto Parts. Here's what would have happened if I hadn't.
If you haven’t read the guide to the 10-Minute Investment Autopsy series, you can find it here. You will get the most out of each case if you:
Pause after the “Original Thesis” section and think about what you would have done
Engage with the discussion questions and other members in the weekly thread designed to help you further improve your investing process
The Original Thesis
Who: Gary Mishuris (me)
When: June 2013
What: Advance Auto Parts (ticker: AAP)
The Thesis:
Advance Auto Parts (AAP) was an investment I made in June 2013 while managing the U.S. Focused Value Fund at Manulife Asset Management. My thesis was:
The automotive aftermarket parts industry has favorable structural industry economics that make it a predictable industry with a slow pace of change
The short distance that someone is willing to drive to get car parts, the frequent urgency of the need, the relatively low cost of the purchase relative to the value and utility of the vehicle, and the value of advice that can be obtained in-store all contribute to customers patronizing the same store over and over as well as reduce the threat of online competition
Advance Auto Parts is a business with moderate sales growth opportunity given the maturity of the market and the large number of stores the company already had, but meaningful margin expansion opportunity exemplified by competitors like O’Reilly Automotive and AutoZone
The stock is priced at approximately two thirds of our Base Case intrinsic value with downside to the Worst Case value estimate of less than 25%
These were the recent financial results available to me at the time of my initial investment thesis:
This was the stock chart at the time that I made the investment:
Pause here. Think through the thesis and the facts and decide what you agree with, what you disagree with and whether you would invest based on the information available.
What Happened (Just the Facts)
These were my position size and price % value estimate during my investment in Advance Auto Parts:
The position started out as a small, 3% position, and quickly grew to a mid-sized ~5% position as additional work increased my confidence in the thesis.
The first few quarters of tracking the thesis were mildly negative, as despite reasonable progress on the margin side, same-store sales were worse than expected.
The management’s assessment that the problems were fixable and due to their own execution rather than more permanent structural issues made sense, especially in light of better results being reported by competitors, so these slightly counter-thesis data points did not result in any reduction of the value estimate.
Over the short period of time that I owned the stock, it did better than both the market and its closest competitors
During 2013 and 2014 same-store sales continued to be weak, with -2% in 2013 and +2% in 2014. These results were substantially below those of competitors O’Reilly Automotive and AutoZone.
However, the market got excited about AAP’s acquisition of General Parts International. It was a large acquisition with large synergies forecast by the management. The market quickly reflected management guidance in the stock price before the results could be known, closing the gap between price and my estimate of value. I used this opportunity to exit our position.
There is a lot more to the case:
The Autopsy - the reasons for what happened
The Lessons that you can apply to your own investing
Discussion Questions for you to think about and discuss with other thoughtful investors in the weekly case thread