Advance Auto Parts, Inc.'s (NYSE:AAP) P/E Is Still On The Mark Following 25% Share Price Bounce

The Advance Auto Parts, Inc. (NYSE:AAP) share price has done very well over the last month, posting an excellent gain of 25%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 17% over that time.

Since its price has surged higher, Advance Auto Parts may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 59.7x, since almost half of all companies in the United States have P/E ratios under 19x and even P/E's lower than 11x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

While the market has experienced earnings growth lately, Advance Auto Parts' earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Advance Auto Parts

Keen to find out how analysts think Advance Auto Parts' future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

Advance Auto Parts' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 46%. The last three years don't look nice either as the company has shrunk EPS by 92% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 74% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 11% per year, which is noticeably less attractive.

In light of this, it's understandable that Advance Auto Parts' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Advance Auto Parts' P/E is flying high just like its stock has during the last month. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Advance Auto Parts' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 3 warning signs for Advance Auto Parts (1 can't be ignored!) that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.