Jeffrey Smith Sees 100% Upside In This Auto Supplier, Shows How It Can Be Unlocked

Shares of Advance Auto Parts, Inc. (NYSE:AAP) have gained more than 11% today after The Wall Street Journal reported last night that Jeffrey Smith’s Starboard Value would reveal a 3.7% stake in the company during the Capitalize for Kids, Sohn Canada Conference in Toronto today, where he is one of the presenters (John Khoury, Jacob Doft, Daniel Lewis, Howard Marks, and Mick McGuire are just a few of the other conference presenters).

The new stake in Advance Auto Parts comes just a day after Smith waded into the melee between Media General Inc (NYSE:MEG), Nexstar Broadcasting Group, Inc. (NASDAQ:NXST), and Meredith Corporation (NYSE:MDP), announcing that he would use his 4.5% stake in Media General to launch a proxy battle if necessary, to ensure shareholders get the best possible outcome in the case. Media General is in the process of acquiring Meredith, which Smith opposes, while being courted itself by Nexstar, which Smith believes would be a good partnership.

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Smith’s presentation on Advance Auto Parts, Inc. (NYSE:AAP), which was seen by The Wall Street Journal, will focus on how the parts supplier could dramatically improve its results by focusing on improving its margins and ensuring that its service stations are fully stocked each day. While Advance Auto Parts was up by about 7% year-to-date at yesterday’s close, that nonetheless trailed industry peers Autozone, Inc. (NYSE:AZO) and O’Reilly Automotive Inc (NASDAQ:ORLY), the latter of which was recently ranked by Goldman Sachs as one of the top quality stocks in the consumer discretionary sector. Autozone and O’Reilly Automotive have enjoyed gains of 17% and 26% this year respectively, thanks to growth in the sector fueled by the cheaper cost of gas.

Smith believes those gains are miniscule compared to what Advance Auto Parts, Inc. (NYSE:AAP) could reach, suggesting greater than 100% upside potential to more than $360 per share with a comprehensive effort made to improve its margins, which trail its aforementioned industry peers. Advance Auto Parts had previously stated its aim to achieve 12% operating margins by the end of 2016.

“We believe that the current market price of Advance does not fully reflect the value of its businesses and that opportunities exist within the control of management and the board of directors of the Company (the “Board”) to create substantial value for all shareholders,” Smith wrote.

Advance Auto Parts’ second quarter results released in mid-August did show a lot of promising signs, leading to a surge of more than 10% in its stock price. While revenue was down slightly, earnings were up to $2.27 per share, suggesting improving margins or reduced expenses (or both). The stock was also buoyed in early July when it was added to the S&P 500, replacing the departed Family Dollar Stores, Inc. (NYSE:FDO).

Smith’s position vaults him to the top of Advance Auto Parts’ shareholder list, of those investors in our database. Fir Tree, founded by Jeffrey Tannenbaum, had the largest position as of June 30 at 1.58 million shares worth over $251 million. Billionaire Stephen Mandel of Lone Pine Capital came next with a new position of 1.22 million shares. Robert Pitts’ Steadfast Capital Management was another investor who opened a new position during the second quarter, of just under 496,000 shares.

Overall, hedge fund ownership of Advance Auto Parts declined during the second quarter, dipping by eight to 34, while the value of their holdings fell by about $260 million to $1.12 billion, even though shares rose during the quarter, so hedge fund sentiment was not overly positive at the time. Given the improving results and the involvement of the respected Jeffrey Smith, we believe that is about to change.

Disclosure: None