How Starboard Value Could Unlock Value At Advance Auto Parts

Shares of Advance Auto Parts, a specialty retailer of aftermarket automotive replacement parts, surged higher by more than 10 percent on Wednesday after Starboard Value disclosed a 3.7 percent stake in the company.

Starboard Value believes that shares of Advance Auto Parts could be worth $350 per share. The investment firm noted that Advance Auto Parts' business model is attractive and even performs well during cyclical downturns, as consumers may defer purchasing a new car and invest in extending the life of their existing cars.

In fact, Advance Auto Parts and several of its peers had positive same-store sales through the 2007–2009 recession.

'Extremely' Favorable Fundamentals, But 'Dramatically' Underperformed

However, Starboard Value pointed out that even though the "extremely" favorable industry fundamentals have benefited the entire group, Advance Auto Parts stock has "dramatically" underperformed its peers. Specifically, shares of Advance Auto Parts has underperformed shares of O'Reilly Automotive Inc ORLY by 295 percent.

Related Link: Next Generation Connected Cars To Have Wireless Updates

'Substantial Value Creation' Possible

The investment firm presented a four point plan that can yield "substantial value creation."

• 1. Operating improvements including reshaping the distribution and supply chain strategy and working capital improvements.
• 2. Unlocking value for Worldpac, an "underappreciated" asset within the company's portfolio.
• 3. Returning capital to shareholders through a "substantial" dividend and/or buyback program.
• 4. Pursuing further consolidation.

Finally, Starboard Value argued that based on a successful execution of its action plan, Advance Auto Parts could be worth $360 per share. In addition, if the company were to achieve O'Reilly's level of profitability and trade at a similar multiple, the implied price is in excess of $420 per share.