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.
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
主要見解
基於二階段自由現金流到股權的預測公允價值,Advance Auto Parts的預計公允價值爲66.23美元。
以58.86美元的股價,Advance Auto Parts看起來接近其預估的公允價值進行交易。
AAP的分析師價格目標爲61.11美元,比我們的公允價值估計低了7.7%。
Advance Auto Parts,Inc. (紐交所:AAP)距離其內在價值有多遠?利用最新的財務數據,我們將通過將預期未來現金流折現到今天的價值來檢查該股票是否定價合理。這將使用貼現現金流量模型(DCF模型)完成。這些模型可能看起來超出普通人的理解範圍,但是它們非常容易理解。
上述計算非常依賴於兩個假設。第一個是折現率,另一個是現金流。如果您不同意這些結果,請自己計算並嘗試更改假設。 DCF還沒有考慮行業可能的週期性,或公司未來的資本需求,因此未能完全展現公司的潛力表現。鑑於我們正在考慮作爲潛在股東的Advance Auto Parts,因此使用權益成本作爲折現率,而不是成本資本(或加權平均成本資本,WACC)來計算。這一計算中我們使用了9.4%,這基於1.673的槓桿beta。beta是股票與整個市場相比的波動性的度量。我們從全球可比公司的行業平均beta中獲得了我們的beta,在0.8到2.0之間的合理範圍內加入了限制,這是一個穩定業務範圍。
Advance Auto Parts的SWOT分析
優勢
債務由現金流很好覆蓋。
AAP的資產負債表摘要。
弱點
過去一年的收益下降了。
債務利息支付能力不太好。
與專業零售市場前25%支付股息股息低相比。
機會
預計年度盈利增長將快於美國市場。
根據市銷率和估計的公平價值,TWKS的價值很好。
威脅
比起收益,股息不受支持。
年度營業收入預計增長速度將慢於美國市場。
查看AAP的股利歷史。
下一步:
DCF計算雖然重要,但不應該是您研究公司時僅看的指標。DCF模型並不是一個完美的股票估值工具。相反,DCF模型最好的用途是測試某些假設和理論,以查看它們是否會導致公司被低估或高估。例如,公司的權益成本或無風險利率的變化可以對估值產生顯著影響。對於advance auto parts(AAP),我們還編制了三個額外的方面供您參考:
風險:每個公司都會有風險,我們已經發現了advance auto parts(AAP)的3個警示信號(其中1個不能被忽視!)您應該知道。