Wednesday, October 26, 2011

Research: AAP Advanced Auto Parts

The basic numbers look good. Rising revenue, rising earnings per share, positive cash flow with around 30%-50% of operating cash going to capital expenditures. Debt of 300m is only around half of 2011's op cash flow. The shareholder equity is not really increasing, but this is explained by the fact that AAP spends a large portion of its cash flow towards repurchasing stock. Considering the PE ratio is under 5, this is probably a good use of its excess cash. However, there are still things that I don't like. If you normalize the number of outstanding shares by looking at the ratio of shareholder equity to outstanding shares, we see 1024m/99m = $10.3/share for 2007 and 1039m/82m = $12.67/share in 2011. Over 4 years, this translates into an average increase in shareholder equity of around 5% per year. Even adding back the ~100m paid out in dividends over 4 years, we would be looking at ~7% increase in equity per year. The rate of increase in accounts payable bothers me. It has gone from 688m in 2007 to 1292m in 2011 although revenues have only increased around 20% in the same time period.

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