Defensive plays aren’t the first thought that comes to mind with tech stocks, especially in the e-commerce space, but that’s how investors ought to be looking at online auto parts and accessories company CarParts.com (CarParts.com Stock Quote, Charts, News, Analysts, Financials NASDAQ:PRTS), according to Roth Capital Partners analyst Darren Aftahi, who just nominated PRTS as a Top Pick for the year ahead. Aftahi reiterated a “Buy” rating on the stock in a Friday note to clients while raising his target price from $7.50 to $9.00 per share, good for a projected one-year return of 41 per cent.
California-based CarParts sells branded and private-label auto parts and accessories and has a distribution footprint allowing it to deliver to 98 per cent of its customers within two days of transit. Last month, CarParts reported record third quarter earnings, with sales up 16 per cent year-over-year to $164.8 million and gross profit up 19 per cent to $56.1 million. The Q3 marked the company’s 11th consecutive quarter of double-digit revenue growth. (All figures in US dollars.)
“Over one-third of our revenue comes from repeat customers and we are consistently growing our addressable market. We launched our Do-It-For-Me program on our website, called Get It Installed, and are one step closer to our goal of becoming the number one destination for our customers,” said CEO David Meniane in a press release.
For Aftahi, it’s CarParts’ prudent cost management and increased operational optimization that supports its Top Pick status. The analyst pointed to the company’s mix of one-third repeat buyers as helping to keep marketing costs flat while sales continue to grow. He also noted that PRTS holds about $155 million in inventory that should begin to convert to cash in 2023 through smaller orders as supply chain constraints have begun to ease. Aftahi thinks those supply chain challenges have been responsible for an overhang on shares, which should reverse course in the new year.
“Fundamentally, we see a combination of cost management and optimization that should enable further margin expansion while maintaining double-digit revenue growth,” Aftahi said. “PRTS’ proactive inventory management should also begin to transition into cash conversion as supply chains ease. A mix of insider buying and a paltry valuation create what we view as a favourable risk/reward with the added benefit of being a low-cost supplier in a weaker macro environment.”
Aftahi said PRTS is currently trading at a “paltry” 0.4x 2023 EV/Sales, which compares to similar business models in the range of 0.5x-1.6x on similar mid-teens year-over-year growth. The analyst’s revised target of $9.00 is based on a 0.6x EV/Sales multiple of his 2023 sales estimate of $740 million.