The projected fair value for Advance Auto Parts is US$66.23 based on 2 Stage Free Cash Flow to Equity
With US$58.86 share price, Advance Auto Parts appears to be trading close to its estimated fair value
Analyst price target for AAP is US$61.11 which is 7.7% below our fair value estimate
How far off is Advance Auto Parts, Inc. (NYSE:AAP) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
What's The Estimated Valuation?
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$219.6m
US$263.1m
US$310.0m
US$310.0m
US$312.3m
US$316.3m
US$321.5m
US$327.6m
US$334.4m
US$341.8m
Growth Rate Estimate Source
Analyst x5
Analyst x5
Analyst x1
Analyst x1
Est @ 0.75%
Est @ 1.28%
Est @ 1.64%
Est @ 1.90%
Est @ 2.08%
Est @ 2.21%
Present Value ($, Millions) Discounted @ 9.4%
US$201
US$220
US$237
US$216
US$199
US$185
US$171
US$160
US$149
US$139
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$1.9b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 9.4%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$5.1b÷ ( 1 + 9.4%)10= US$2.1b
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$3.9b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$58.9, the company appears about fair value at a 11% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
NYSE:AAP Discounted Cash Flow August 6th 2024
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 9.4%, which is based on a levered beta of 1.673. 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 Parts
Strength
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.
Opportunity
Annual earnings are forecast to grow faster than the American market.
Good value based on P/S ratio and estimated fair value.
Threat
Dividends are not covered by earnings.
Annual revenue is forecast to grow slower than the American market.
See AAP's dividend history.
Next Steps:
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Advance Auto Parts, we've compiled three additional aspects you should look at:
Risks: Every company has them, and we've spotted 3 warning signs for Advance Auto Parts (of which 1 can't be ignored!) you should know about.
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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
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.
Have 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. 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
主要见解
基于二阶段自由现金流到股权的预测公允价值,Advance Auto Parts的预计公允价值为66.23美元。
以58.86美元的股价,Advance Auto Parts看起来接近其预估的公允价值进行交易。
AAP的分析师价格目标为61.11美元,比我们的公允价值估计低了7.7%。
Advance Auto Parts,Inc. (纽交所:AAP)距离其内在价值有多远?利用最新的财务数据,我们将通过将预期未来现金流折现到今天的价值来检查该股票是否定价合理。这将使用贴现现金流量模型(DCF模型)完成。这些模型可能看起来超出普通人的理解范围,但是它们非常容易理解。
上述计算非常依赖于两个假设。第一个是折现率,另一个是现金流。如果您不同意这些结果,请自己计算并尝试更改假设。 DCF还没有考虑行业可能的周期性,或公司未来的资本需求,因此未能完全展现公司的潜力表现。鉴于我们正在考虑作为潜在股东的Advance Auto Parts,因此使用权益成本作为折现率,而不是成本资本(或加权平均成本资本,WACC)来计算。这一计算中我们使用了9.4%,这基于1.673的杠杆beta。beta是股票与整个市场相比的波动性的度量。我们从全球可比公司的行业平均beta中获得了我们的beta,在0.8到2.0之间的合理范围内加入了限制,这是一个稳定业务范围。
Advance Auto Parts的SWOT分析
优势
债务由现金流很好覆盖。
AAP的资产负债表摘要。
弱点
过去一年的收益下降了。
债务利息支付能力不太好。
与专业零售市场前25%支付股息股息低相比。
机会
预计年度盈利增长将快于美国市场。
根据市销率和估计的公平价值,TWKS的价值很好。
威胁
比起收益,股息不受支持。
年度营业收入预计增长速度将慢于美国市场。
查看AAP的股利历史。
下一步:
DCF计算虽然重要,但不应该是您研究公司时仅看的指标。DCF模型并不是一个完美的股票估值工具。相反,DCF模型最好的用途是测试某些假设和理论,以查看它们是否会导致公司被低估或高估。例如,公司的权益成本或无风险利率的变化可以对估值产生显著影响。对于advance auto parts(AAP),我们还编制了三个额外的方面供您参考:
风险:每个公司都会有风险,我们已经发现了advance auto parts(AAP)的3个警示信号(其中1个不能被忽视!)您应该知道。