Advance Auto Parts, Inc. (NYSE:AAP) closed yesterday at $163.42, which left some investors asking whether the high earnings potential can still be justified at this price.
Let’s look into this by assessing AAP’s expected growth over the next few years.
Where’s the growth?
Advance Auto Parts is poised for significantly high earnings growth in the near future.
The consensus forecast from 20 analysts is
with earnings per share estimated to surge from current levels of
$5.749 to $10.896 over the next three years.
On average, this leads to a growth rate of 18% each year,
which indicates an exceedlingly positive future in the near term.
Can AAP’s share price be justified by its earnings growth?
Advance Auto Parts is available at price-to-earnings ratio of 28.43x, showing us it is
overvalued based on current earnings compared to the Specialty Retail industry average of 15.64x
overvalued compared to the US market average ratio of 17.69x
We already know that AAP appears to be overvalued when compared to its industry average.
to properly examine the value of a high-growth stock such as Advance Auto Parts, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise.
A PE ratio of 28.43x and expected year-on-year earnings growth of 18% give Advance Auto Parts
PEG ratio of 1.61x.
This tells us that when we include its growth in our analysis Advance Auto Parts’s stock can be considered
a bit overvalued
, based on the fundamentals.
What this means for you:
AAP’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional.
If you have not done so already, I
you to complete your research by taking a look at the following:
- Financial Health: Are AAP’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has AAP been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of AAP’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
The easiest way to discover new investment ideas
Save hours of research when discovering your next investment with Simply Wall St. Looking for companies potentially undervalued based on their future cash flows? Or maybe you’re looking for sustainable dividend payers or high growth potential stocks. Customise your search to easily find new investment opportunities that match your investment goals. And the best thing about it? It’s FREE. Click here to learn more.