Estimating The Intrinsic Value Of Advance Auto Parts, Inc. (NYSE:AAP)

Simply Wall St.00:40

Key Insights Using the 2 Stage Free Cash Flow to Equity, Advance Auto Parts fair value estimate is US$38.63 Advance Auto Parts' US$45.99 share price indicates it is trading at similar levels as its ...

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(NYSE:AAP)","media":"Simply Wall St.","content":"<div>\n<p>Key Insights Using the 2 Stage Free Cash Flow to Equity, Advance Auto Parts fair value estimate is US$38.63   Advance Auto Parts' US$45.99 share price indicates it is trading at similar levels as its ...</p>\n\n<a href=\"https://simplywall.st/stocks/us/retail/nyse-aap/advance-auto-parts/news/estimating-the-intrinsic-value-of-advance-auto-parts-inc-nys\">Source Link</a>\n\n</div>\n","source":"simplywall_highlight","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Estimating The Intrinsic Value Of Advance Auto Parts, Inc. 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(NYSE:AAP)\n</h2>\n\n<h4 class=\"meta\">\n\n\n2025-01-09 00:40 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://simplywall.st/stocks/us/retail/nyse-aap/advance-auto-parts/news/estimating-the-intrinsic-value-of-advance-auto-parts-inc-nys><strong>Simply Wall St.</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Key Insights Using the 2 Stage Free Cash Flow to Equity, Advance Auto Parts fair value estimate is US$38.63   Advance Auto Parts' US$45.99 share price indicates it is trading at similar levels as its ...</p>\n\n<a href=\"https://simplywall.st/stocks/us/retail/nyse-aap/advance-auto-parts/news/estimating-the-intrinsic-value-of-advance-auto-parts-inc-nys\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"NYSE","symbol_name":"纽交所","start_time":0,"source_url":"https://simplywall.st/stocks/us/retail/nyse-aap/advance-auto-parts/news/estimating-the-intrinsic-value-of-advance-auto-parts-inc-nys","article_id":"2502082861","we_media_id":null,"thumbnails":["https://images.simplywall.st/asset/industry/9551705-choice1-main-header/1585186890631"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2502082861","pubTimestamp":1736354449,"columns":[],"sourceInfo":{"source_id":"simplywall_highlight","name":"Simply Wall St."},"weMediaInfo":null,"summary":"Key Insights Using the 2 Stage Free Cash Flow to Equity, Advance Auto Parts fair value estimate is US$38.63 Advance...","collect":0,"end_time":0,"defaultTopTitle":"simplywall.st","property":[],"viewcount":null,"language":"en","relate_stocks":{"NYSE":"纽交所","FCF":"第一联邦金融","BK4100":"有线和卫星","BK4211":"区域性银行","DCF":"Dreyfus Alcentra Global Credit Income 2024 Target Term Fund, Inc","AAP":"Advance Auto Parts Inc","BK4585":"ETF&股票定投概念","BK4214":"汽车零售","TV":"墨西哥电视","BK4588":"碎股"},"translate_title":"估算Advance Auto Parts，Inc.（纽约证券交易所代码：AAP）的内在价值","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"AAP":1,"DCF":1,"FCF":1,"NYSE":1,"TV":1},"content_text":"Key Insights Using the 2 Stage Free Cash Flow to Equity, Advance Auto Parts fair value estimate is US$38.63   Advance Auto Parts' US$45.99 share price indicates it is trading at similar levels as its fair value estimate    The US$44.29 analyst price target for AAP is 15% more than our estimate of fair value   Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Advance Auto Parts, Inc. (NYSE:AAP) as an investment opportunity  by taking the expected future cash flows and discounting them to today's value.  The Discounted Cash Flow (DCF) model is the tool we will apply to do this.  Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.  Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation.  If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.  See our latest analysis for Advance Auto Parts  Crunching The Numbers   We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase.  To begin with, we have to get estimates of the next ten years of cash flows.   Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.   Generally we assume that a dollar today is more valuable than a dollar in the future,  and so the sum of these future cash flows is then discounted to today's value:  10-year free cash flow (FCF) estimate  2025 2026 2027 2028 2029 2030 2031 2032 2033 2034  Levered FCF ($, Millions)  -US$43.4m US$96.7m US$76.0m US$204.0m US$215.0m US$224.0m US$232.3m US$240.1m US$247.7m US$255.1m Growth Rate Estimate Source Analyst x5 Analyst x4 Analyst x2 Analyst x1 Analyst x1 Est @ 4.17% Est @ 3.70% Est @ 3.38% Est @ 3.15% Est @ 2.99%  Present Value ($, Millions) Discounted @ 10%  -US$39.5 US$79.9 US$57.1 US$139 US$133 US$126 US$119 US$112 US$105 US$98.2 (\"Est\" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$930m The second stage is also known as Terminal Value, this is the business's cash flow after the first stage.  The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.6%. We discount the terminal cash flows to today's value at a cost of equity of 10%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$255m× (1 + 2.6%) ÷ (10%– 2.6%) = US$3.5bPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= US$3.5b÷ ( 1 + 10%)10= US$1.4b The total value, or equity value, is then the sum of the present value of the future cash flows,  which in this case is US$2.3b.  The last step is to then divide the equity value by the number of shares outstanding.  Compared to the current share price of US$46.0, the company appears   around fair value    at the time of writing.   Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind. NYSE:AAP Discounted Cash Flow January 8th 2025  Important Assumptions  We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows.  You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them.  The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance.  Given that we are looking at Advance Auto Parts as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt.  In this calculation we've used 10%, which is based on a levered beta of 1.795. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.  SWOT Analysis for Advance Auto PartsStrength Debt is well covered by cash flow. Balance sheet summary for AAP. Weakness Earnings declined over the past year. Interest payments on debt are not well covered.Dividend is low compared to the top 25% of dividend payers in the Specialty Retail market. Expensive based on P/E ratio and estimated fair value. Opportunity Annual earnings are forecast to grow faster than the American market. Threat Dividends are not covered by earnings. Annual revenue is expected to decline over the next 4 years.  See AAP's dividend history.  Next Steps:  Whilst important, the DCF calculation  is only one of many factors that you need to assess for a company.  It's not possible to obtain a foolproof valuation with a DCF model.  Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation.  For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result.  For Advance Auto Parts, we've put together three  pertinent  factors  you should consider:   Risks: Case in point, we've spotted   3 warning signs for Advance Auto Parts  you should be aware of, and 1 of them is potentially serious.    Future Earnings: How does AAP's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.  Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!   PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.New: Manage All Your Stock Portfolios in One PlaceWe've created the ultimate portfolio companion for stock investors, and it's free.• Connect an unlimited number of Portfolios and see your total in one currency• Be alerted to new Warning Signs or Risks via email or mobile• Track the Fair Value of your stocksTry a Demo Portfolio for FreeHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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. 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