Advance Auto Parts’ Valuation after Its 3Q17 Results
AAP’s valuation multiples
Valuation multiples are commonly used in the automotive and auto parts retail industry to compare different businesses entities. It’s important to note that we can only use valuation multiples to compare companies that are similar in nature in terms of size or financials.
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Forward valuation multiples
On November 15, 2017, Advance Auto Parts’ forward EV-to-EBITDA1 multiple was 7.6x. In comparison, the forward EV-to-EBITDA multiples of its peers O’Reilly Automotive and AutoZone were 10.3x and 8.7x, respectively.
To calculate these multiples, we took the estimated next-12-month EBITDA for these companies.
Similarly, Advance Auto Parts’ forward price-to-earnings (or PE) ratio was 15.7x. This metric was also lower than ORLY’s forward PE multiple of 16.6x but higher than AZO’s 12.7x.
Key factors to watch ahead
Unlike the auto manufacturing business, the auto parts retail business has relatively lower investment requirements to drive future growth. This factor lowers Advance Auto Parts’ risk profile, which could be a positive factor for its valuation.
In contrast, AAP’s weakening sales and shrinking profitability could lower its earnings growth estimates for upcoming quarters. Therefore, continued negative sales and profitability trend could negatively affect its valuation multiples going forward.
In the next part, we’ll see what Wall Street analysts are recommending for Advance Auto Parts (AAP) stock after its 3Q17 earnings results.
- enterprise value to earnings before interest, tax, depreciation, and amortization ↩