Sterne Agee Initiates Coverage On 'Top Pick' Advance Auto Parts

Sterne Agee initiated coverage on Advance Auto Parts, Inc. AAP with a Buy rating and $165 price target. The firm's aftermarket auto parts analyst report named it a Top Pick.

According to analysts Ali Faghri and Michael Ward, “The secular shift to the faster growing and larger [Do-It-For-Me (DIFM)] segment favors companies with a strong commercial focus.”

“Advance Auto Part’s acquisition of General Parts International in early 2014 presents an opportunity for earnings accretion as the company executes on integration. Even after a significant move post the deal, we see upside to shares as strong free cash flow should allow the company to quickly deleverage and resume share repurchases,” according to Faghri.

The report noted that “AAP has historically traded at a forward P/E multiple of 14.0x. Relative to our 2015 EPS estimate, AAP is trading at 16.6x. On an EV/EBITDA basis, AAP is currently trading at 8.5x our 2015 EBITDA estimate, above its historical average of 6.5x.”

The $165 price target is based on an 18.0x FY 2015 EPS estimate of $8.82 and 10.0x the FY 2015 EBITDA estimate of $1.38 billion.

Faghri concluded, “a premium multiple is warranted given earnings accretion and potential synergies from the [General Parts International] transaction.”

Advance Auto Parts recently traded at $145.44, up 0.38 percent.