Is There Now An Opportunity In Advance Auto Parts, Inc. (NYSE:AAP)?

Let's talk about the popular Advance Auto Parts, Inc. (NYSE:AAP). The company's shares saw significant share price movement during recent months on the NYSE, rising to highs of US$210 and falling to the lows of US$165. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether Advance Auto Parts' current trading price of US$181 reflective of the actual value of the large-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Advance Auto Parts’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

Check out our latest analysis for Advance Auto Parts

What's The Opportunity In Advance Auto Parts?

Advance Auto Parts appears to be expensive according to my price multiple model, which makes a comparison between the company's price-to-earnings ratio and the industry average. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 20.19x is currently well-above the industry average of 6.97x, meaning that it is trading at a more expensive price relative to its peers. But, is there another opportunity to buy low in the future? Since Advance Auto Parts’s share price is quite volatile, this could mean it can sink lower (or rise even further) in the future, giving us another chance to invest. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.

What does the future of Advance Auto Parts look like?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. With profit expected to grow by 69% over the next couple of years, the future seems bright for Advance Auto Parts. It looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.

What This Means For You

Are you a shareholder? It seems like the market has well and truly priced in AAP’s positive outlook, with shares trading above industry price multiples. At this current price, shareholders may be asking a different question – should I sell? If you believe AAP should trade below its current price, selling high and buying it back up again when its price falls towards the industry PE ratio can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on AAP for a while, now may not be the best time to enter into the stock. The price has surpassed its industry peers, which means it is likely that there is no more upside from mispricing. However, the positive outlook is encouraging for AAP, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.

So while earnings quality is important, it's equally important to consider the risks facing Advance Auto Parts at this point in time. You'd be interested to know, that we found 1 warning sign for Advance Auto Parts and you'll want to know about it.

If you are no longer interested in Advance Auto Parts, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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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.