Optimistic Investors Push Advance Auto Parts, Inc. (NYSE:AAP) Shares Up 29% But Growth Is Lacking

Despite an already strong run, Advance Auto Parts, Inc. (NYSE:AAP) shares have been powering on, with a gain of 29% in the last thirty days. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Advance Auto Parts' P/S ratio of 0.4x, since the median price-to-sales (or "P/S") ratio for the Specialty Retail industry in the United States is about the same. 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.

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See our latest analysis for Advance Auto Parts

What Does Advance Auto Parts' Recent Performance Look Like?

Advance Auto Parts could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. If not, then existing shareholders may be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Advance Auto Parts.

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like Advance Auto Parts' is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.9% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 19% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the analysts covering the company suggest revenue growth is heading into negative territory, declining 0.2% per annum over the next three years. With the industry predicted to deliver 5.6% growth per year, that's a disappointing outcome.

With this information, we find it concerning that Advance Auto Parts is trading at a fairly similar P/S compared to the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

The Bottom Line On Advance Auto Parts' P/S

Its shares have lifted substantially and now Advance Auto Parts' P/S is back within range of the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

While Advance Auto Parts' P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If we consider the revenue outlook, the P/S seems to indicate that potential investors may be paying a premium for the stock.

You always need to take note of risks, for example - Advance Auto Parts has 2 warning signs we think you should be aware of.

If companies with solid past earnings growth is up your alley, 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.