With Earnings Looming, CarParts.com Needs a Pullback

It took a while, but investors finally pegged CarParts.com (NASDAQ:PRTS) as a pandemic winner. As recently as mid-April, PRTS stock was in the red for 2020. Three and a half months later, the story looks very different.

assortment of cars in a parking lot

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In fact, PRTS is the 20th-best stock in the entire market year-to-date, with a whopping 473% gain. Over the past year, performance is even more impressive: only six stocks (out of some 7,500) have exceeded PRTS’ 933% rally.

The gains make some sense. CarParts.com is benefiting from the pandemic-driven shift to e-commerce. That shift has driven up other online retailers from Amazon (NASDAQ:AMZN) to Overstock.com (NASDAQ:OSTK). PRTS stock is a natural, and somewhat logical, beneficiary of similar optimism.

But after the parabolic gains, it does look like PRTS may have gotten ahead of its skis. Valuation now looks questionable for a company with modest margins. Another secular shift attracting investors suggests long-term pressure on demand.

With earnings due on Aug. 10, it does appear that expectations have become a bit too high. At the very least, the easy money has been made.

Results Improve

Again, PRTS isn’t a bubble. There are reasons for the huge rally so far this year.

Results have sharply improved of late. Even before the pandemic arrived in force, CarParts.com seemed to be heading in the right direction. EBITDA (earnings before interest, taxes, depreciation and amortization) more than doubled in last year’s fourth quarter after declining sharply in the first nine months of the year. Private-label sales led the way, with 15% revenue growth in Q4 and a beneficial impact on margins.

CarParts.com was a turnaround story for years — and not a successful one. PRTS stock was ‘dead money’ from 2013 to the first half of last year. But results heading into 2020 showed some long-awaited progress.

First quarter results were even more impressive. Revenue rose 18%. Private-label sales growth accelerated to 42%. Gross profit, according to the Q1 release, hit its highest level in almost ten years. A business that lost money, even on an EBITDA basis, the year before turned a profit of over $4 million.

The Pandemic Boost

To be sure, first quarter results got some help from changing consumer behavior amid “stay at home” orders. But, again, even before the novel coronavirus began to spread in the U.S., results were getting better.

Now, CarParts.com looks perfectly positioned. Once customers move online, they tend to stay there. The company even changed its name this week, from the former U.S. Auto Parts Network, to “reflect the tech-forward company it has become.”

Again, this isn’t a bubble, where investors are buying PRTS stock simply because it happens to be an online retailer. There is a case for the name when looking closer.

But it bears repeating: the stock has risen nearly 500% so far this year. Obviously, quite a bit of good news is priced in.

The Case Against PRTS Stock

Meanwhile, there are concerns.

The first is relative to the size of the market. Yes, CarParts.com finally is generating growth. It should get a boost from changing behavior.

But at least so far, auto parts customers historically haven’t shopped online to the same extent seen in other categories. For AutoZone (NYSE:AZO), for instance, online sales drive “substantially below 5%” of its do-it-yourself business, according to that company’s third quarter conference call. It doesn’t appear the numbers are much different for rivals Advance Auto Parts (NYSE:AAP) or O’Reilly Automotive (NASDAQ:ORLY).

CarParts.com still looks like a niche business. And with the market capitalization clearing $500 million, a niche business may not be enough.

The other issue is precisely those rivals. The likes of AutoZone and O’Reilly will be fearsome competitors. They no doubt are leveraging their loyalty databases to drive online sales of their own. And their scale means they can attract new online customers via pricing — even if that requires an upfront loss.

Be Careful Ahead of Earnings

This is not to say that PRTS stock is a short. Far from it. The business is improving, and it’s even possible that one of the three major brick-and-mortar retailers looks to acquire the suddenly-improved company.

But the rally so far this year has been steep. Valuation, nearing 2x revenue, is high given ~33% gross margins and the nature of the space.

And earnings look like a potential “sell the news” event. Expectations will be high. Anything short of a stunning blowout is likely to be greeted with profit-taking.

If we do see a post-earnings dip, PRTS admittedly would look intriguing. Before the release, however, it looks like the rally has gone too far.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/moneywire/2020/07/earnings-looming-prts-stock-needs-pullback/.

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