⏩ Speedy thesis #5: AAP, CNM
Stocks that pay a dividend while you wait for capital appreciation.
Speedy thesis works as a starting point for investment research: presenting potential opportunities and helping readers to select companies and stocks fitting into their own (dividend investment) strategy and portfolio.
In the episode 5 we have only two companies.
A | Advance Auto Parts - auto parts distributor. 5.4% dividend yield.
B | Core & Main - water infrastructure distributor. No dividend.
A |Advance Auto Parts ($AAP) 🇺🇸
🔑 The most hated among the greatest, swing trade / dividend investment, return to the mean
AAP is automotive parts retailer. AAP’s competitors O’Reilly and Autozone have offered investors phenomenal returns over the years. AAP has performed much worse due to much lower capital returns.
As for me, it is difficult to see O’Reilly or Autozone providing any safety margin for an investor, they are priced to perfection. Where as AAP is trading significantly below it’s fair value with 10% discount rate and much lower terminal multiple than it’s been historically priced for. With a 8% discount rate AAP would be significantly undervalued.
Thesis 💡
The share is trading at 25-50% lower multiples than its 5 year averages.
AAP is trading significantly lower multiples than its peers which is justified by its capital returns. However AAP has not enjoyed much multiple expansion in the past years.
The management of the company has often been criticized. New CEO coming on board as the current one Tom Greco is retiring.
AAP will benefit from the aging car fleet in the U.S. as a result of reduced purchasing power and rising prices of new vehicles.
Counter thesis: The clear reason for the rapid sell-off is unclear. “If you don’t know who the fool is, it’s you.”
ORLY 0.00%↑ and AZO 0.00%↑ have obviously been great investments. AAP has not enjoyed any of multiple expansion and of course it's difficult to expect it to happen in the current macro environment. Nevertheless, that should provide a bit of downside protection already, even if the free fall of the stock has not yet stopped.
In the tweet below there’s good overview of the 3-4 auto parts distributors.
At the lower end of the EPS guidance and with a modest EPS growth expectations the fair value of the stock would be $127. EPS CAGR ~5% for 5Y and 10Y. Dividend growth rate much higher due to the change in capital allocation. Average P/E 18-22.
Previous editions have covered other automotive related stocks: Autoliv, the leader in safety systems, and Standard Motor Products, a manufacturer of automotive spare parts.
B | Core & Main ($CNM) 🇺🇸
🔑 Low absolute and relative valuation, concentrated ownership and high short float, cyclical business supported by investment programs, consolidator.
Core & Main is not really a paid to wait stock, it doesn’t pay a dividend. Still, I’m quite interested in it.
Core & Main is recently IPOed distributor of water infrastructure products in the United States. It’s a peril of Home Depot’s HD Supply from which PE investor Clayton, Dubilier & Rice LLC acquired the business focusing on water infrastructure and fire protection.
Thesis 💡
Concentrated ownership with a high short float (15%). CD&R owns 58.3%
Excellent business momentum. Cyclicality could be smoothed by the government investment programs on infrastructure.
Lot of potential for inorganic growth by consolidating the fragmented industry.
Low absolute and relative valuation against its peers.
There are no big expectations baked in the stock price.
The end game: CNM builds market leadership through acquisitions and organic growth becoming no. 1 in its niche and reaches leading profitability by scale and best in class service and availability.
Pay attention: 1) The company has “$600m in unaccounted liabilities that they have to pay back to partners” as pointed out in the comments of my analysis below. 2) Construction slowdown will hit CNM first, their product go underground.
For more information please read my analysis on Seeking Alpha.
My twitter handles
🇬🇧 English: @paidwait
🇫🇮 Finnish: @anttisleinonen