The Ratings Game: Advance Auto Parts stock jumps as Wall Street zeroes in on better margins, guidance

Shares of Advance Auto Parts Inc. skyrocketed 25% Tuesday after quarterly profit came in well above expectations and the company kept its full-year guidance intact, offsetting a slight sales miss.

The stock was on track for its highest close since Oct. 3 and its intraday high of $102.89 was its highest since Aug. 14. It was the best performer on the S&P 500 index SPX, -0.23%  on Tuesday.

“After stunningly poor results in both (first quarter and second quarter), we believe the company has finally started to show some progress against their long-term profit plans,” analysts at RBC Capital said in a note Tuesday.

Turnarounds are never linear and Advance Auto Parts AAP, +17.73%  would be no exception, they said, but if the company can deliver on its margin goals “we think it will be the biggest margin expansion story in Hardlines/Broadlines retail – and the stock will likely reward investors if they can execute,” they said, using a term that encompasses full-line and specialty retail stores.

The run for Advance Auto Parts also lifted shares of competitors O’Reilly Automotive Inc. ORLY, +0.74%  and AutoZone Inc. AZO, +2.11%  

Advance Auto Parts earlier Tuesday reported adjusted third-quarter earnings of $1.43 a share on sales of $2.18 billion. Analysts polled by FactSet had expected adjusted earnings of $1.21 a share on sales of $2.21 billion.

Wall Street also zeroed in on a smaller-than-expected decline in margins rather than the sales miss and the overall soft sales trends for the chain.

Margin performance was “far better than modeled, as gross profit dollars exceeded our estimate, and expense dollars tracked well below,” analysts at Goldman Sachs said in a note Tuesday. The guidance implies 2017 per-share earnings in the $4.50-$5.50 range, encompassing Goldman’s and Wall Street’s around $5 to $5.15 a share, they said.

Analysts at Oppenheimer said they left Advance Auto Part’s post-earnings conference call “still fretting” about soft sales, “but incrementally encouraged by a more upbeat tone of management toward the company’s repositioning efforts and the health of the broader environment.”

Initiatives that included material cost improvements, third-party fee reductions, and improvements in utility, maintenance and repair costs contributed to the margin beat, analysts at Wedbush said in their note.

Shares of Advance Auto Parts have lost 42% this year, contrasting with gains around 15% for the S&P 500 SPX, -0.23%   and 18% for the Dow Jones Industrial Average DJIA, -0.12%  . The underperformance is less stark on a three-month basis, with the stock off 11% compared with gains around 4.5% for the benchmark.

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