This article is a reprint of my 31 July 2008 RealMoney column.

On July 23, J.D. Power & Associates cut its 2008 forecast for new light-vehicle sales and said it now expects U.S. sales to hit a 15-year low this year. The new estimate calls for 750,000 fewer cars to be sold than had been estimated as recently as March.

I’m sure that high gas prices are encouraging marginally more use of alternatives such as car-pooling or public transportation, but I also know from experience that those options are not always viable even if desired. Commuting and work schedules vary widely, so finding someone going your way at the time you need is often all but impossible. So I read the decline in new vehicle sales as a different kind of cost-cutting — namely, keeping a perfectly good older vehicle for a little longer. In other words, the average age of a U.S. vehicle is likely to increase somewhat from the current 9.2 years. And, of course, an aging vehicle requires more repairs. Even cost-conscious consumers may decide it is worthwhile to get the car tuned up and eke out an extra mile per gallon. That, in turn, should benefit companies such as Advance Auto Parts (AAP) , Autozone (AZO) and Genuine Parts (CPC) . Of the three, I believe Advance Auto Parts is best positioned for gains.

Advance Notice

Advance is the second-largest specialty retailer of automotive parts, accessories and maintenance items to “do-it-yourself,” or DIY, and “do-it-for-me,” or DIFM, customers in the U.S. Its stores carry a standard 16,000 stock-keeping units, or SKUs, on hand and can access another 80,000 for overnight delivery. In other words, if you need a part, Advance can get it for you. The company reports earnings on Aug. 7 and is expected to earn 72 cents a share for the quarter, though that really seems to be just a guess. Advance seems to alternate between missing estimates in one quarter and beating the next.

The full-year numbers should be more reliable, however, and on that basis Advance Auto is expected to earn $2.66 in 2008 and $2.92 in 2009. Both of those estimates have been revised higher over the last 90 days. The revisions, which are in the 3% range, compare favorably with a 1% increase in estimates for Autozone over the same time period and shrinking estimates at General Parts.

At 15.6 times the current-year earnings estimate, Advance Auto Parts is trading at the low end of its five-year valuation range (its average P/E has been 18.4 times). If the company earns $2.92 per share next year, as expected, and trades at that average P/E, the shares could appreciate by 30%, to $54.

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Source: Zacks Research Wizard, compiled by William A. Trent

Given that Advance has been improving its returns on capital, I believe that, if anything, it now merits an above-average earnings multiple. For one thing, the rising returns on investment lead me to believe that the 13.7% consensus three-to-five-year earnings growth forecast is, if anything, conservative. If the growth forecasts are realized, however, and the company returns to its average P/E after five years, the shares could reach $93, for total annual returns of 17.5%.

At the time of publication, Trent had no positions in stocks mentioned, although positions may change at any time.

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