BMO cuts Advance Auto Parts target to $40, keeps rating

On Thursday, BMO Capital Markets adjusted its outlook on Advance Auto Parts (NYSE:AAP) shares, reducing the price target to $40 from the previous $45, while maintaining a Market Perform rating. BMO Capital’s move follows the company’s release of its fourth-quarter results for the fiscal year 2024, which surpassed expectations. Trading at $37.73, InvestingPro analysis suggests the stock is currently undervalued. The automotive parts provider also confirmed its preliminary guidance for 2025 and objectives for 2027, indicating a steady long-term strategy.

Despite the positive results, Advance Auto Parts is facing several challenges that are impacting its short-term performance. The stock has taken a significant hit, dropping nearly 15% in the past week alone, according to InvestingPro data. According to BMO Capital, these headwinds include unfavorable weather conditions, delays in tax refunds, and broader macroeconomic pressures that are affecting consumer spending. These factors have contributed to the company’s first-quarter expectations falling short of analyst predictions, with revenue growth declining by 19.4% in the last twelve months.

Advance Auto Parts has been implementing internal measures aimed at enhancing its business, such as merchandising initiatives, supply chain improvements, and better store operations. While the company maintains a strong tradition of shareholder returns, having paid dividends for 20 consecutive years, InvestingPro data shows concerning financial health metrics with a weak overall score. However, BMO Capital suggests that the benefits of these improvements are likely to become more evident in the second half of the year. As a result, the firm has chosen to maintain its Market Perform rating until there are clear signs of operational progress.For investors seeking deeper insights, InvestingPro offers 6 additional exclusive ProTips and a comprehensive Pro Research Report for AAP, along with detailed analysis of 1,400+ other US stocks.

The analyst at BMO Capital, Tristan Thomas-Martin, elaborated on the decision, stating, "AAP’s 4Q24 results primarily exceeded expectations, with preliminary 2025 guidance and 2027 objectives reiterated. While management remains optimistic about its longterm strategy, near-term headwinds remain, which led to 1Q expectations coming in below Street forecasts. Given benefits from internal improvements are more of a 2H story, we remain Market Perform until we see tangible operating improvements. Target (NYSE:TGT) lowers to $40."

Investors and market watchers will be closely monitoring Advance Auto Parts as it navigates through these near-term challenges and works towards realizing the anticipated benefits from its strategic improvements later in the year.

In other recent news, Advance Auto Parts reported its fourth-quarter 2024 earnings, revealing an adjusted diluted loss per share of $1.18, which was better than the anticipated loss of $1.31. The company’s revenue reached $2 billion, surpassing forecasts of $1.93 billion. Despite these positive earnings, analysts from RBC Capital and Citi have expressed concerns, leading to a reduction in the company’s stock price targets. RBC Capital lowered its target from $50 to $44, citing challenges in gross margin improvements and various atypical items impacting financial results. Citi also reduced its target from $47 to $40, maintaining a Neutral rating due to doubts about the effectiveness of Advance Auto Parts’ turnaround strategy and weak cash flow projections. The company is undergoing significant operational changes, including store closures and distribution center consolidation, to improve its financial performance. Advance Auto Parts has projected net sales between $8.4 billion and $8.6 billion for 2025, with expected comparable sales growth. These developments reflect ongoing efforts to stabilize and enhance the company’s market position.

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