Genuine Parts Is Very Undervalued

I last reviewed Genuine Parts (GPC) in this July 21 post at which time it had released Q2 and YTD2023 financial results and FY2023 guidance. Now, GPC has released Q3 and YTD 2023 results and its share price has tumbled prompting me to revisit this existing holding.

Business Overview

Part 1 Item 1 in GPC's FY2022 Form 10-K is a good source of information to learn about the company.

Acquisitions

GPC has grown organically, however, mergers and acquisitions are a key component to its growth; at any given time, GPC has 125 active discussions across its global acquisition pipeline.

These mergers and acquisitions have been instrumental in GPC's top line having risen from ~$14.078B in FY2013 to ~$22.1B in FY2022 and ~$17.5B in the first 9 months of FY2023.

On average GPC had deployed ~$0.27B in bolt-on capital per year during the 2015 – 2022 timeframe. In the first 3 quarters of FY2023, GPC has acquired several businesses for ~$0.232B, net of cash acquired.

During the nine months ended September 30, 2023, GPC recognized ~$0.29B and $0.038B of revenue, net of store closures, related to its Automotive and Industrial acquisitions, respectively.

In early August, GPC announced the acquisition of Gaudi. Details are provided in this Press Release; this acquisition builds on GPC's 2022 acquisition of Lausan. GPC expects the Gaudi acquisition to be accretive to its European business post synergies.

Financials

Q3 and YTD2023 Results

GPC's Form 8-K and Form 10-Q released on October 19 are accessible here.

GPC reported strong results on a company-wide basis. In both the automotive and industrial end markets, GPC continues to benefit from solid industry fundamentals. Both businesses are mostly break-fix and nondiscretionary in nature. As a result, GPC remains focused on offering solutions that support its customers to have the right part in the right place at the right time across both business segments.

In the Industrial segment, GPC is benefiting from a highly diversified portfolio of customers and end markets with overall growth driven by manufacturing and opportunities with onshoring and reshoring trends.

The underlying fundamentals of the Global Automotive aftermarket remain favourable (an increase in miles driven, an aging and complex vehicle fleet, and high vehicle prices and financing costs).

GPC's global Automotive network sells to customers in both commercial do-it-for-me ('DIFM') and retail do-it-yourself ('DIY') segments of the market and covers substantially all global motor vehicle models. DIFM customers include local, regional and national repair centers, auto dealers, service stations and both private and public sector accounts. DIY customers are primarily served over the counter at GPC's global stores or digitally. DIFM and DIY customers account for ~80% and ~20% of Automotive total sales, respectively.

The success in the automotive aftermarket is highly dependent on the availability of inventory, particularly for the important DIFM customer.

Having the right part in the right place at the right time, however, has been a challenge in GPC's US Automotive segment which explains the weakness in GPC's share price.

Sales in the US automotive business declined ~1% in Q3, with comparable sales down ~2.9%. This decline includes the negative impact of 1 less selling day YoY. In addition, Q3 2022 included the benefit of sales associated with the NAPA Expo, a sales event held about every 5 years. Management states this negatively impacted YoY comparisons by ~170 bps. Collectively, these 2 factors represent ~340 bps of headwind in evaluating GPC's YoY growth performance in the U.S.

In Q3 2023, sales to both commercial and retail customers were down slightly with commercial and DIY essentially performing at similar levels.

GPC's commercial business, however, was mixed in Q3 as fleet and government outperformed and major accounts remained pressured driven by the impact of tighter market conditions on the end consumer.

On the Q3 earnings call, management stated that underperformance is a combination of execution and further tightening of market conditions. In addition, while supply chains have improved significantly post-pandemic, GPC has continued to experience some lingering issues with inventory availability in a few product categories; GPC's fill rates have been below acceptable levels in a few product categories.

In order to rectify the issues, GPC continues to be disciplined on the costs front. It is also intensifying operational rigour at its stores and is enhancing its inventory strategies using investments made in data analytics tools. Furthermore, the merchandising teams have partnered with alternative suppliers to ensure GPC's markets are properly stocked.

Financial Condition / Liquidity and Capital Resources

For the first 9 months of FY2023, GPC generated ~$1.1B in cash from operations and ~$0.733B in FCF free cash flow. At the end of Q3, it had $2.2B in available liquidity, and its debt to adjusted EBITDA was 1.6x; GPC's target range is 2 - 2.5x.

GPC expects to be able to continue to borrow funds at reasonable rates over the long term. On September 30, 2023, its total average cost of debt was 2.33%, and it remained in compliance with all covenants connected with its borrowings.

Details are provided commencing on page 24 of 31 in the Q3 Form 10-Q.

Capital Allocation

This is GPC's YTD2023 capital allocation.

GPC's capital allocation in FY2022 is provided below for comparison.

FY2023 Outlook

GPC has once again increased its FY2023 adjusted diluted EPS outlook. It now anticipates an increase of ~10.3% - 11.5% from FY2022's $8.34 in adjusted diluted EPS.

The following was GPC's FY2023 outlook when it released Q2 2023 results.

This is GPC's original FY2023 outlook presented on February 23 when Q4 and FY2022 results were released.

FY2025 Financial Targets

While GPC's FY2025 financial targets are presented in my March 23 post, I provide them again for ease of reference.

 

Credit Ratings

GPC’s unsecured long-term debt ratings remain unchanged from the time of my July review.

• Moody’s: Baa1 (stable outlook)
• S&P Global: BBB (stable outlook)

Moody’s rating is the top tier of the lower medium grade. S&P Global’s rating is the middle tier of the lower medium grade. Both ratings are investment grade and are defined as an obligor having ADEQUATE capacity to meet its financial commitments. Adverse economic conditions or changing circumstances, however, are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.

Both ratings are satisfactory for my purposes.

Dividends and Share Repurchases

Dividend and Dividend Yield

GPC's dividend history is accessible here.

My interest lies in an investment's TOTAL potential long-term shareholder return. I, therefore, am indifferent if a company distributes no/little dividend IF retained earnings can improve long-term investor returns.

Having said this, GPC will appeal to investors who fixate on dividend metrics. It has:

• distributed a cash dividend to shareholders every year since going public in 1948; and
• increased its dividend for 67 consecutive years.

In mid-November, we can expect GPC to declare its 4th consecutive $0.95/share quarterly dividend. In mid-February 2024, I anticipate that GPC will increase its quarterly dividend by at least $0.05 to $1.00/share. If this materializes, the next 4 quarterly dividend payments will total $3.95. Using the current ~$133 share price, the forward dividend yield is ~2.97%.

Share Repurchases

GPC's weighted average shares outstanding in FY2012 - FY2022 are (in millions of shares) 156, 156, 154, 152, 150, 148, 147, 146, 145, 144 and 142.3.

In the first 3 quarters of FY2023, GPC repurchased 1.1 million shares for ~$0.172B. Share base compensation over the same timeframe was ~$0.047B. The weighted average common shares outstanding for the quarter ending September 30 was ~140.9.

The company expects to remain active in its share repurchase program. However, the amount and value of shares repurchased will vary and is at the discretion of the Board.

Valuation

I reference my July 21 post in which I reflect GPC's valuation when I wrote previous posts.

Using GPC's current ~$133 share price and the forward-adjusted diluted earnings estimates from the brokers which cover GPC, the forward-adjusted diluted PE levels are:

• FY2023 - 15 brokers - ~14.4 based on a mean of $9.23 and low/high of $9.16 - $9.32.
• FY2024 - 15 brokers - ~13.3 based on a mean of $9.97 and low/high of $9.49 - $10.25.
• FY2025 - 9 brokers - ~12.05 based on a mean of $11.04 and low/high of $10.65 - $11.59.

At its March 23 Investor Day, GPC stated that it is targeting $11.00 - $11.50 in diluted EPS in FY2025. Using this range and the current ~$133 share price, the forward diluted PE is 11.6 - 12.1.

I have been a GPC shareholder since July 24, 2017. Other than roughly mid/late March 2020 when the North American economy shut down because of COVID, I do not recall GPC having ever been valued so attractively. I hope GPC is aggressively repurchasing shares!

Final Thoughts

There is no denying that GPC needs to improve its performance in the US portion of its Automotive segment. The company, however, appears to be taking appropriate steps to do so. I, therefore, consider negative investor sentiment to be an opportunity to acquire shares in a company that, for the most part, is performing well.

GPC is growing, is profitable, has ample liquidity, and generates strong FCF. It also has ample growth opportunities (domestic and international) and I am confident GPC will meet/surpass its FY2025 financial targets.

GPC was not a top 30 holding when I completed my Mid-2023 Investment Holdings Review. I did, however, want to increase my exposure when I considered its valuation to be attractive. Unfortunately, I have added to my exposure in other holdings within the same account in which I hold GPC shares so my liquidity in that account is low. Nevertheless, I couldn't pass up the opportunity to increase my exposure and acquired a few additional shares on October 19 @ $130.61. I now hold 465 GPC shares in a 'Core' account within the FFJ Portfolio.

I wish you much success on your journey to financial freedom!

Note: Please send any feedback, corrections, or questions to [email protected].

Disclosure: I am long GPC.

Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.

I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.