2023-03-05 03:58:29 ET
Summary
- CarParts.com has been posting some nice operational improvements as of late.
- Management is due to report financial results covering the final quarter of the company's 2022 fiscal year.
- So long as current trends persist, the firm should generate attractive upside for investors moving forward.
Even though the automotive space may not be the most attractive right now because of high interest rates and the high inflation that the interest rates are being designed to combat against, there are some players in this market that seemed to have potential. One firm that has been underappreciated, in my opinion, is CarParts.com ( PRTS ). For those not familiar with the company, it basically operates as an aftermarket auto parts and accessories online seller. From a financial perspective, the overall picture for the company has been showing nice signs of improvement. Analysts also expect that to spill over into the fourth quarter of the company's 2022 fiscal year that management is due to report data on after the market closes on March 7th. Unfortunately, the investment community has only really pushed shares of the company down in recent months. But so long as we don't have any unexpected surprises on the downside when the company reports in the coming days, I do believe that upside potential from here is warranted.
A divergence
The last article that I wrote about CarParts.com was published in the middle of June of 2022. Up to that point, the company was continuing to demonstrate attractive growth on both its top line and on its bottom line. This came about even during what has been considered an unusual and difficult market for most companies across most industries. With this financial performance looking positive and with how shares were priced at the time, I felt as though some upside was warranted. As such, I ended up rating the business a ‘buy’ to reflect my view that shares should outperform the broader market moving forward. Fast forward to today, and the opposite, sadly, has transpired. While the S&P 500 has generated a return for investors of 10.4%, shares of CarParts.com have dropped by 7.4%.
Author - SEC EDGAR Data
Looking solely at this price disparity, you might think that the fundamental condition of the company was worsening. But interestingly, there is a divergence here. Instead of financials worsening, they have actually been improving. Consider data covering the third quarter of the company's 2022 fiscal year. This is the most recent quarter for which data has been made available. During that time, revenue came in at $164.8 million. That's 16.2% higher than the $141.8 million the company reported only one year earlier. Management attributed this sales increase largely to strong demand for its services. It would be nice to be able to go deeper into detail on this. But sadly, management didn't really provide much on this front. They did say that they benefited from the launch of the company’s Do-It-For-Me program on its website, called Get It Installed, and they also said that they continue to focus on areas to expand their revenue streams.
On the bottom line, the picture for the company also improved. The firm went from generating a net loss of $4.7 million in the third quarter of 2021 to generating a loss of only $1 million the same time of the 2022 fiscal year. Continued growth and the economies of scale that come with it helped the company grow its gross profit margin from 33.4% to 34.1%. Though this may not seem like much, when applied to the amount of revenue achieved in the third quarter, it translated to an additional $1.2 million in pre-tax profits for the business. The company also saw its other operating expenses improve from 36.4% of sales to 34.4%. Other profitability metrics for the company followed a similar path. Operating cash flow went from negative $9.3 million to positive $0.2 million. If we adjust for changes in working capital, it would have risen from $2 million to $5.8 million. And finally, EBITDA for the company expanded from $2.3 million to nearly $6.3 million.
Author - SEC EDGAR Data
The third quarter was not a one-time event for the business. We see a similar trend when looking at data for the first nine months of the year relative to the same nine months one year earlier. Revenue, for instance, increased from $444.2 million to $507.1 million. Improved margins and higher sales helped to push the company from a net loss of $5.3 million to a net profit of $5.3 million. Operating cash flow turned from negative $8.3 million to positive $5.7 million, while the adjusted figure for this expanded from $13.2 million to $22.9 million. And finally, EBITDA for the company popped up from $14.2 million to $24 million.
Author - SEC EDGAR Data
As I mentioned previously, management is expected to announce financial results covering the final quarter of the 2022 fiscal year. At present, analysts are forecasting revenue of roughly $151.8 million. That would represent a sizable improvement over the $138.3 million the company reported one year earlier. The company is also expected, according to analysts, to report a loss per share of $0.12. Although it's horrible to see any sort of bottom line hit, this is better than the $0.20 per share loss the company reported for the final quarter of 2021. The loss per share reported at the same time last year came out to $5 million. No guidance was given when it came to other profitability metrics. But for context, operating cash flow was $1.3 million, while the adjusted figure for this was $2.2 million. Meanwhile, EBITDA totaled $2.6 million. Investors should be paying very close attention to all of these metrics since they are some of the most important in determining the health of the firm.
Author - SEC EDGAR Data
Since we don't really know what to expect for the 2022 fiscal year as a whole, I performed my own estimate and calculated adjusted operating cash flow for the year of $26.7 million and EBITDA for the firm of $28.4 million. If these numbers come to fruition, the company would be trading at a price to adjusted operating cash flow multiple of 13 and at an EV to EBITDA multiple of 12.5. These numbers look quite attractive on an absolute basis. But banking on this does come with some risk. For instance, if we assume that the company eventually reverts back to the levels of profits seen in 2020 or 2021, the stock looks, at best, fairly valued. So for those who do think we are likely to see a sustained pullback, there is a sizable amount of risk of downside to consider.
Takeaway
From all the data in front of me, it looks as though CarParts.com has found itself a really great business model that is finally showing signs of stability. Revenue continues to expand while bottom line results are improving nicely. This is not to say that the company doesn't have issues. Even the data recently reported shows that the business is a low-margin operator. As it scales, this should get better. But in the meantime, small fluctuations in margins could significantly impact shareholders in a negative way. For those who believe that management can continue the trajectory that they have shown as of late, I would make the case that some upside potential exists from here. As such, I've decided to keep the ‘buy’ rating I previously assigned the company. But for those who are cautious about the space in general, it might be a good idea to look elsewhere for opportunities.
For further details see:
CarParts.com Q4 2022 Earnings Preview: Attractive If Robust Improvements Continue