Advance Auto Parts Inc (AAP, Financial) experienced a daily gain of 3.43%, with an Earnings Per Share (EPS) (EPS) of 6.73. However, the question arises: is this stock a potential value trap? To answer this, we delve into a comprehensive valuation analysis of Advance Auto Parts (AAP).
Company Introduction
Advance Auto Parts is a leading player in the aftermarket automotive parts industry, providing tools and accessories to do-it-yourself customers and third-party vehicle repair facilities across North America. As of the end of 2022, the company operated 5,086 stores and serviced 1,311 independently owned Carquest stores. Its Worldpac chain is a premier distributor of imported original-equipment parts, contributing to 59% of its 2022 sales from commercial clients. Currently, the company's stock price is $72.03, with a GF Value of $210.26, suggesting a possible value trap.
Understanding the GF Value
The GF Value is a proprietary measure that estimates a stock's intrinsic value. It is calculated based on historical trading multiples, a GuruFocus adjustment factor derived from the company's past performance and growth, and future business performance estimates. If a stock's price is significantly above the GF Value Line, it is considered overvalued and likely to yield poor future returns. Conversely, if it's significantly below, its future return is expected to be higher.
Based on this calculation, Advance Auto Parts (AAP, Financial), with a market cap of $4.3 billion, appears to be a potential value trap.
Financial Strength
Investing in companies with low financial strength can result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before investing. Advance Auto Parts has a cash-to-debt ratio of 0.05, ranking worse than 90.01% of companies in the Retail - Cyclical industry, suggesting a fair balance sheet.
Profitability and Growth
Companies that have consistently shown profitability offer less risk to investors. Advance Auto Parts has been profitable for the past 10 years, with a revenue of $11.2 billion and an EPS of $6.73 over the past twelve months. Its operating margin is 5.37%, ranking better than 60.9% of companies in the Retail - Cyclical industry.
Growth is a vital factor in a company's valuation. Advance Auto Parts's 3-year average revenue growth rate is better than 69.64% of companies in the Retail - Cyclical industry. Its 3-year average EBITDA growth rate is 8%, ranking better than 50.61% of companies in the same industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can also evaluate its profitability. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. Over the past 12 months, Advance Auto Parts's ROIC is 6.39 while its WACC is 5.41.
Why a Value Trap?
Despite Advance Auto Parts' potential undervaluation, there are signs indicating a possible value trap. The company's Altman Z-score stands at 1.46, placing it in the distress zone and signaling an increased bankruptcy risk. Ideally, a Z-score above 2.99 reflects a safer financial position. To further understand the Z-score's role in assessing a company's financial risk, please click here.
Conclusion
In summary, Advance Auto Parts (AAP, Financial) appears to be a potential value trap. Despite its fair financial condition and strong profitability, the company's growth ranks better than only 50.61% of companies in the Retail - Cyclical industry. To learn more about Advance Auto Parts stock, you can check out its 30-Year Financials here.
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