Advance Auto Parts is A Great Risk/Reward Play If EPS Delivers
One of the main drivers of stock price performance is the underlying earnings per share (EPS) growth for any business's future. With this in mind, one of the simplest ways investors can land on a good upside opportunity is to find companies that trade well below their relative highs but can still fill those price gaps based on where future EPS growth may be headed.
In the automotive sector, one stock completes this profile in terms of upside and a discounted price. This is a great risk-to-reward setup favoring buyers as long as the company can deliver on this EPS promise.
The benefit of this setup is that, even if these growth targets fall short, the stock is already trading at a low price, making it unlikely to rally significantly for its shareholders.
That stock is Advance Auto Parts Inc. (NYSE: AAP), a key player in the supply chain of parts used both in bulk and retail. This position places the company in an advantageous position considering where the industry is today. With trade tariffs affecting the supply and demand side for new and used vehicles in the United States, there's one primary reason why Advance Auto Parts could very well deliver on this EPS promise.
Breaking Down the Advance Auto Parts Setup
Even though the stock now trades at 85% of its 52-week high, after a year-to-date rally of 28.2%, the relative price action is still a shadow of what it could be when investors zoom out far enough. In 2022, Advance Auto Parts traded as high as $244 per share due to similar industry dynamics that are currently unfolding.
In 2022, there was a real supply chain disruption caused by the aftermath of COVID-19 lockdowns, which interrupted the importation of semiconductors and chips from other countries. As these are essential materials in automotive manufacturing, people turned to used vehicles because new vehicles were not readily available.
While the situation isn't as harsh today, tariffs have created a similar setup when it comes to new vehicles.
Increased costs and uncertainty have slowed the manufacturing and import of new vehicles, leaving consumers only one choice: to explore the used vehicle market.
Logically, used vehicles require more upkeep, and that's where aftermarket parts come into play for consumers and dealers. When preparing a used car for sale, these dealers represent a sales source for Advance Auto Parts and the consumer side.
Those who choose not to buy into this tight new vehicle market will have to maintain their current vehicle, so whichever way the industry is analyzed, demand for parts is sure to rise. This is precisely where the MarketBeat EPS consensus forecast for $1.05 by the third quarter of 2025 comes into play.
Momentum is Here Before Schedule
Even though Wall Street is expecting an EPS growth rate of 52% from today's reported 69 cents, the most recent quarterly earnings figure matters even more. The 69 cents in EPS exceeded the consensus of 59 cents, indicating that this industry dynamic may already be in play sooner than most would have thought.
This is where a widely followed valuation metric can be helpful for retail investors. The price-to-earnings-growth (PEG) ratio attempts to gauge whether tomorrow's EPS growth is priced at today's valuation. Advance Auto Parts' 0.3x multiple suggests roughly 70% of this future growth is yet to be priced.
Attached to this EPS performance is another optimism gauge. As of August 2025, institutional buyers from State Street increased their Advance Auto Parts stock holdings by 13.5%, bringing their entire position to a high of $111.9 million, or 4% ownership of the whole company.
Whether it's momentum, fundamentals, or a combination of both, these professional investors see opportunities ahead for Advance Auto Parts stock in the coming quarters. All in all, there is one final factor investors should consider when evaluating this potential unfair advantage in terms of risk-to-reward for Advance Auto Parts.
Because this company has a market capitalization of $3.6 billion, it is much easier for it to double in size than for a much bigger company.
At the same time, there needs to be a big disappointment or disruption for it to contract from where it is today; this is why investors have minimal downside risk compared to the explosive upside potential they can encounter in this stock.
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