Advance Auto Parts, Inc.'s (NYSE:AAP) Share Price Could Signal Some Risk

There wouldn't be many who think Advance Auto Parts, Inc.'s (NYSE:AAP) price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S for the Specialty Retail industry in the United States is similar at about 0.4x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Advance Auto Parts

How Advance Auto Parts Has Been Performing

Advance Auto Parts could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

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.

Is There Some Revenue Growth Forecasted For Advance Auto Parts?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Advance Auto Parts' to be considered reasonable.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Still, the latest three year period was better as it's delivered a decent 5.0% overall rise in revenue. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 1.4% per annum as estimated by the analysts watching the company. With the industry predicted to deliver 5.7% growth each year, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Advance Auto Parts' P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

When you consider that Advance Auto Parts' revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Advance Auto Parts (1 is potentially serious) you should be aware of.

If these risks are making you reconsider your opinion on Advance Auto Parts, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com