Little did I know one “cold call” with Gus would end up being one of the most important phone calls of my entire career.
Gus was the real estate manager of Advance Auto Parts (AAP) and at the time this sleepy little auto parts chain had under 100 locations.
I was fresh out of college, and I was a hungry real estate developer hustling to find a good tenant to build for.
I had heard about a Virginia-based auto parts chain that was looking to open new stores in my home state of South Carolina. So, I called up the company’s real estate manager (Gus) to pitch him a new site.
Over time, I was able to convince Gus and his counterparts at Advance Auto to allow me to build a store in Laurens, SC which led to another 49 stores being built over the next decade.
My projects were spread across five states (VA, NC, SC, GA, and AL) and the total value creation was over $60 million.
It was a lot of work. I had to secure the site for the store, and hire engineers, architects, and contractors to make sure the buildings were completed on time and on budget.
I also had to convince bankers and investors that Advance Auto was a worthy tenant, and that they would pay the rent.
For a young developer in his 20s, Advance Auto was a terrific customer, and I was able to capitalize on their growth.
Fast forward now three decades and the company has 4,998 stores located across the U.S., Canada, the U.S. Virgin Islands, Puerto Rico and Mexico, operating under several brands including Advance Auto Parts, Carquest, and Worldpac.
Today, I am going to share with you one company to put on your watchlist and give you a chance to capitalize on another opportunity that could set you up for success, just as this one simple phone call did for me.
Misfortune Leads to a Major Shift
When I was a developer, I made a decent fortune building stores for Advance Auto – I became a multimillionaire very quickly.
Since then I’ve traded in my hard hat for a laptop. Now I enjoy helping my readers make money by picking high-quality income-oriented stocks that have the same growth potential as Advance Auto in the early 1990s.
And right now, there is a major shift taking place.
A few weeks ago, Advance Auto slashed its dividend by 83%, prompting several sell side analysts to downgrade the stock. Its shares plunged 35% after the cut.
On the latest earnings call the CEO, Tom Greco announced that their first quarter operating margin rate of 2.6% was well below expectations due to investments that were higher than planned as well as an unfavorable product mix.
The company reduced full-year guidance in net sales, operating income margin (from 8% to 5.15%), and earnings per share (EPS) (from $10.70 to $6.25 per share).
Although this is a disappointing earnings release for a company that made me a small fortune, there is an investment opportunity being created that you should keep on your watchlist.
Add This Company to Your Watchlist
Now I’m not recommending Advance Auto today after the company slashed its dividend by a whopping 83%.
But there is growing talk that suggests Advance Auto could become an M&A (mergers and acquisitions) target to suitors such as AutoZone (AZO) and O’Reilly Automotive (ORLY).
All three companies operate a combined 17,800+ stores and I believe O’Reilly is best positioned to pounce on the now-wounded Advance Auto.
AutoZone recently delivered a revenue miss for the quarter. And even though management updated its buyback program (repurchasing 356,000 shares for $908.2 million in the quarter), O’Reilly is most likely to acquire Advance Auto.
And in comparison to AutoZone, O’Reilly had a solid quarter highlighted by a robust 10.8% increase in comparable store sales. The company also recently celebrated its 30th year as a public company.
O’Reilly is now trading at $932.55 per share, which is a bit pricey given the prices to earnings (P/E) multiple of 26.4x (a normal multiple is around 24x).
But, its forward-looking double-digit growth prospects (of around 11%) for 2024 and 2025 are very promising – that does not even include the possible M&A deal with Advance Auto.
So put it on your watchlist as the recession draws near and stock prices go down. O’Reilly is an excellent company to have in your portfolio.
I recommended buying O’Reilly back in 2010. And since that time shares have returned over 1,518% (25% annually).
You could see even greater gains in the next few years if you buy O’Reilly at a discounted price, and it’s able to pounce on Advance Auto.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily
Source: Wide Moat Research