As of July 19, 2023, Advance Auto Parts Inc (AAP, Financial) has seen a 4.52% change in its stock price, now standing at $72.44. With a market capitalization of $4.3 billion and sales reaching $11.2 billion, the company's financial metrics are noteworthy. However, the GF Value, a unique indicator of a stock's intrinsic worth, stands at $210.14, suggesting that Advance Auto Parts might be a value trap. Let's delve deeper into the company's operations, history, and financial health to understand this valuation better.
Advance Auto Parts, a major player in the aftermarket automotive parts sector, caters to do-it-yourself customers and third-party vehicle repair facilities in North America. With 5,086 stores and servicing 1,311 independently owned Carquest stores by the end of 2022, the company has established a significant presence in the industry. Its Worldpac chain is a premier distributor of imported original-equipment parts. In 2022, Advance Auto Parts derived 59% of its sales from commercial clients, with the remainder from DIY shoppers.
GF Value and Stock Valuation
The GF Value is GuruFocus' estimate of a stock's fair value, calculated based on historical trading multiples, past business growth, and future business performance estimates. If a stock's price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it's significantly below the GF Value Line, its future return will likely be higher. Currently, Advance Auto Parts' stock price is significantly lower than its GF Value, suggesting it may be a value trap.
Financial Strength and Risk Analysis
Investing in companies with robust financial strength reduces the risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage can provide insights into a company's financial health. Advance Auto Parts has a cash-to-debt ratio of 0.05, worse than 89.79% of companies in the Retail - Cyclical industry, indicating fair financial strength.
Profitability and Growth
Profitable companies with high profit margins typically offer better performance potential. Advance Auto Parts has been profitable for 10 years over the past decade. During the past 12 months, the company had revenues of $11.2 billion and an EPS of $6.73. Its operating margin of 5.37% is better than 61.19% of companies in the Retail - Cyclical industry.
The 3-year average annual revenue growth rate of Advance Auto Parts is 10.4%, ranking better than 69.62% of companies in the Retail - Cyclical industry. The 3-year average EBITDA growth rate is 8%, ranking better than 50.39% of companies in the same industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to the weighted average cost of capital (WACC) can determine its profitability. The ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Advance Auto Parts’s ROIC is 6.39, and its WACC is 5.21.
Conclusion
Considering all factors, Advance Auto Parts (AAP, Financial) appears to be a potential value trap. Despite its fair financial condition and strong profitability, the company's stock valuation suggests caution. Its growth ranks better than 50.39% of companies in the Retail - Cyclical industry. For a comprehensive understanding of Advance Auto Parts stock, check out its 30-Year Financials here.
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