Auto Stocks

Advance Auto Parts Inc Valuation – November 2016 $AAP

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – August 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Advance Auto Parts Inc (AAP) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Advance Auto Parts, Inc. provides automotive aftermarket parts in North America, serving do-it-for-me (commercial) and do-it-yourself (DIY), customers, as well as independently owned operators. The Company’s stores and branches offer a selection of brand name, original equipment manufacturer (OEM) and private label automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars, vans, sport utility vehicles and light and heavy duty trucks. The Company also offers other miscellaneous offerings, including e-services. The Company operates approximately 5,170 total stores and over 120 branches, which operate in the United States, Canada, Puerto Rico and the United States Virgin Islands under the names Advance Auto Parts, Autopart International (AI), Carquest and Worldpac. The Company serves its commercial customers and DIY customers through various channels ranging from traditional brick and mortar store locations to self-serving e-commerce sites.

AAP Chart

AAP data by YCharts

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation.  In addition, here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

moderngraham-valuation-of-aap-november-2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $11,703,896,847 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.37 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 156.45% Pass
6. Moderate PEmg Ratio PEmg < 20 26.08 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.20 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.37 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.73 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

aap-value-chart-november-2016

EPSmg $6.23
MG Growth Estimate 6.08%
MG Value $128.71
Opinion Overvalued
MG Grade C-
MG Value based on 3% Growth $90.37
MG Value based on 0% Growth $52.98
Market Implied Growth Rate 8.79%
Current Price $162.57
% of Intrinsic Value 126.31%

Advance Auto Parts, Inc. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor is only concerned with the low current ratio. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $4.44 in 2012 to an estimated $6.23 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 8.79% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Advance Auto Parts, Inc. revealed the company was trading above its Graham Number of $74.61. The company pays a dividend of $0.24 per share, for a yield of 0.1% Its PEmg (price over earnings per share – ModernGraham) was 26.08, which was above the industry average of 17.79. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-4.02.

Advance Auto Parts, Inc. receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

aap-charts-november-2016

Net Current Asset Value (NCAV) -$4.02
Graham Number $74.61
PEmg 26.08
Current Ratio 1.37
PB Ratio 4.20
Current Dividend $0.24
Dividend Yield 0.15%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2016
Total Current Assets $5,262,126,000
Total Current Liabilities $3,837,351,000
Long-Term Debt $1,042,633,000
Total Assets $8,414,645,000
Intangible Assets $1,643,753,000
Total Liabilities $5,558,924,000
Shares Outstanding (Diluted Average) 73,860,000

Earnings Per Share History

Next Fiscal Year Estimate $6.38
Dec2015 $6.40
Dec2014 $6.71
Dec2013 $5.32
Dec2012 $5.22
Dec2011 $5.11
Dec2010 $3.95
Dec2009 $2.83
Dec2008 $2.49
Dec2007 $2.28
Dec2006 $2.16
Dec2005 $2.13
Dec2004 $1.66
Dec2003 $1.11
Dec2002 $0.60
Dec2001 $0.13
Dec2000 $0.23
Dec1999 -$0.30
Dec1998 -$0.04

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $6.23
Dec2015 $6.02
Dec2014 $5.64
Dec2013 $4.90
Dec2012 $4.44
Dec2011 $3.81
Dec2010 $3.02
Dec2009 $2.49
Dec2008 $2.26
Dec2007 $2.06
Dec2006 $1.81
Dec2005 $1.46
Dec2004 $1.00
Dec2003 $0.57
Dec2002 $0.24
Dec2001 $0.04
Dec2000 -$0.01

Recommended Reading:

Other ModernGraham posts about the company

Advance Auto Parts Inc. Analysis – Initial Coverage $AAP

Other ModernGraham posts about related companies

Delphi Automotive PLC Valuation – August 2016 $DLPH
Carmax Inc Valuation – August 2016 $KMX
BorgWarner Inc Valuation – August 2016 $BWA
Ford Motor Company Valuation – August 2016 $F
O’Reilly Automotive Inc Valuation – July 2016 $ORLY
Genuine Parts Co Valuation – July 2016 $GPC
Johnson Controls Inc Valuation – July 2016 $JCI
Goodyear Tire & Rubber Co Valuation – July 2016 $GT
Harley-Davidson Inc Valuation – June 2016 $HOG
Autozone Inc Valuation – June 2016 $AZO

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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