Summary

  • This Genuine Parts Company stock analysis is based on its Q2 2017 results which were reported July 20, 2017.
  • Total sales were up 5% to a record setting $4.1B, net income was $0.19B, and EPS increased 1% to $1.29 versus Q2 2016.
  • YTD FY2017, businesses with approximately $0.18B in annual revenues have been acquired. GPC has also made a minority investment in a market leading industrial distributor in Australia.
  • Management is of the opinion the long-term fundamental drivers for its U.S. automotive aftermarket business remains sound.
  • With a track record of 61 consecutive years of dividend increases, GPC is a member of the exclusive Dividend King group of companies (50 consecutive years of dividend increases).

Introduction

First and foremost, I wish to apologize for roughly one month of radio silence. If you read my Financial Plans Should Account for Potential Major Mental Health Issues post I hope you will understand why I have been distracted from blogging.

I sincerely hope you have never experienced, nor will you ever experience what my family has recently experienced. I suspect, however, that some readers will not be so fortunate. Mental illness is far too prevalent in our modern day society!

Our recent life events have reinforced to me that my investment strategy is the right strategy for my family. Using baseball as an analogy, I am not looking to hit “home runs”. My investment strategy is more along the line of getting multiple back to back singles. I will also settle for the occasional extra base hit and I am even willing to get “hit by a pitch” on the condition it is not a career ending hit.

My primary objective is to invest in companies which have a competitive advantage and which have demonstrated an ability to pay an ever increasing stream of dividends to its shareholders. If you ever experience what we have recently experienced you will be grateful that income continues to flow your way without any effort on your part.

This brings us to the subject of today’s post, Genuine Parts Company (NYSE: GPC), which released its Q2 earnings on July 20, 2017. What appeals to me about GPC is its lengthy track record of success and its ability to consistently increase its annual dividend.

GPC - Track Record of Success

GPC - Track Record of Success

Business Overview

GPC is the leading independent U.S. distributor of automotive replacement parts; it also has operations in Canada, Mexico, Australia, and New Zealand.

There are 57 NAPA warehouse distribution centers in the U.S., about 1,100 company-owned jobbing stores, 4 Rayloc auto parts rebuilding plants, 4 Balkamp distribution centers, 2 Altrom America import parts distribution centers, and 20 heavy vehicle parts distribution centers and facilities.

In addition, it owns either a controlling or non-controlling interest in seven corporations which operate approximately 152 auto parts stores in 12 US states.

Expansion continues through a combination of internal growth and acquisitions. In the most recent fiscal year ending December 31, GPC acquired 11 companies in the automotive parts group and 5 in the industrial group, 2 in the office products group, and 1 in the electrical/electronic materials group.

The automotive parts segment (~ 53% of FY2016 revenue) serves about 5,900 NAPA Auto Parts stores, including about 1,100 company-owned stores, which sell to garages, service stations, car and truck dealers, fleet operators, leasing companies, bus and truck lines, etc..

The industrial parts segment (30%) distributes around 3 million industrial replacement parts and related supply items, including bearings, power transmission equipment replacement parts, including hydraulic and pneumatic products, material handling components, agricultural and irrigation equipment, and related items from locations in the U.S. and Canada.

S. P. Richards Co., the office products group (13% of FY2016 revenue), distributes about 50,000 office product items, including information processing supplies and office furniture, machines and supplies to office suppliers, from facilities in the U.S. and Canada.

The EIS electrical/electronics materials group (4% of FY2016 revenue) wholesales and distributes material and supplies to the electrical and electronic industries.

In fiscal 2016, the U.S. accounted for 84% of sales, Canada 9%, Australasia 7%, and Mexico represented less than 1%.

GPC - Company Overview

GPC - Company Overview

Q2 2017 Results

On July 20, 2017 GPC released its Q2 2017 results for the 6 month period ending June 30, 2017.

Q2’s gross margin was 30.2% compared to 29.9% in Q2 2016 and the objective is to produce an approximate 30% gross margin over the balance of the current fiscal year.

Organic growth (total comparative sales were up 2% in Q2 and improved relative to the last several quarters) and bolt-on acquisitions continue to be a key component of GPC’s growth. The low-single digit comparative sales growth continues to pressure GPC’s net margins but the company’s sales and cost initiatives are expected to drive stronger growth and to improve margins over the long term.

The U.S. operations continue to represent just over 70% of GPC’s Automotive revenues. Total sales were up 4% in Q2. On the commercial side of the U.S. automotive business, sales to GPC’s NAPA AutoCare Centers were up 1% but sales to major accounts and fleet customers remained under pressure and were down low-single digits.

Weather impacts GPC’s automotive business; management indicated in the Q2 conference call that sales trends correlate to the warmer than average winter weather and cooler summer temps in May and June.

GPC continues to expand its NAPA Rewards Program on the retail side of the business; there are roughly 5 million members and the intent is to continue to enhance the program into 2018. This is a loyalty program which is available in-store and online. It is viewed by GPC as an important initiative in the broader scope of its continued retail growth as GPC continues to experience higher retail tickets and more frequent visits from NAPA Rewards members.

As far as the trends GPC is seeing across the U.S. automotive aftermarket, the long-term fundamental drivers for its business remain sound. The size of the vehicle fleet continues to grow with the average age of the fleet around 11.7 years. Lower fuel prices also remain favorable for the consumer and miles driven continue to post steady gains.

GPC - Consumers Are Maintaining Older Vehicles

GPC - Consumers Are Maintaining Older Vehicles

As a reasonably conservative investor, I look for companies with a strong balance sheet. GPC fits the bill with a ~25.5% total debt to capitalization and an average cost of debt is 2.49%.

I also like that GPC has generated $0.345B in cash from operations YTD. The full year cash from operations forecast is $0.9B - $0.95B with projected FCF (excludes CAPEX and dividends) projected to fall in the $0.35B - $0.4B range.

GPC has increased its annual dividend for 61 consecutive years. The 2017 annual dividend of $2.70/share represents approximately 57% of GPC’s prior year earnings. These are both strong selling features for someone like me who is relying on equity investments to pay me an ever growing income stream during my retirement years.

Guidance for Remainder of FY2017

Total sales are expected to be in the 3% - 4% range which is unchanged from initial guidance.

EPS for the full year, however, is being revised downward to $4.70 - $4.75 from previous guidance of $4.75 - $4.85. The reason for the downward revision is that management had expected to be further along with cost saving initiatives at this stage of the year when it released its forecast at the beginning of the current fiscal year.

Improved profitability over the balance of the year is still expected with cost savings expected to come from headcount reductions, facility rationalization, and a broad range of productivity projects that are currently underway across GPC’s businesses.

Dividend

GPC’s current dividend yield is 3.26%.

You can find its dividend distribution history here. I have also calculated the compound annual growth rate of GPC’s dividend for 2001 – 2017. The growth rate is moderate but steady and is skewed lower because of the moderate increases in the early 2000s. The increase in 2017 was also minuscule but I would much prefer management be prudent when raising its annual dividend as opposed to raising the annual dividend merely to appease investors.

GPC - Dividend Growth Rate 2001 - 2017

GPC - Dividend Growth Rate 2001 - 2017

GPC is a member of the exclusive Dividend King group of companies. These are companies which have a minimum of 50 consecutive years of dividend increases. GPC has increased its annual dividend for 61 consecutive years thus giving me some level of confidence that management will most likely keep this streak alive going forward.

Valuation

The current mean FY2017 adjusted EPS projections from various brokers is $4.75 and $5.15 for FY 2018. As previously noted, management indicated in the Q2 conference call on July 20, 2017 that the full year EPS outlook was being revised downward to $4.70 - $4.75 from its previous guidance of $4.75 - $4.85.

GPC - Earnings Estimates July 21 2017

GPC - Earnings Estimates July 21 2017

I will err on the side of caution and will use an annual EPS of $4.70 for the purpose of my calculations.

As I compose this post, GPC is trading at $82.71. Using the $4.70 full year EPS forecast I get an adjusted PE of 17.60. If I use the forecast FY 2018 mean EPS of $5.15 I get a projected PE of 16.07. If the FY 2018 EPS were to come in at $4.95, the forward PE using the current market price would be roughly 16.71. I view the aforementioned PE levels as acceptable for the purposes of initiating a position in GPC.

I also view other ratios reflected in the following image as being acceptable for my purposes.

GPC - Morningstar Ratios July 2017

GPC - Morningstar Ratios July 2017

Genuine Parts Company Stock Analysis - Final Thoughts

GPC has been on my radar screen for the last few years. I opted to invest in other companies in early 2016 when GPC’s stock price was relatively similar to the current level. Subsequent to that time frame I have viewed GPC as too expensive for my liking. The recent retracement in price, the company’s dividend track record, its strong balance sheet, and the fact GPC stands to benefit from consumers maintaining older vehicles are reasons why I intend to initiate a position in GPC within the next 72 hours; these shares will be held in the FFJ Portfolio.

My investment time horizon is several years. I caution you that if you choose to initiate a position in GPC, do not expect this investment to be a grand slam home run in the short term.

What I expect from my investment in GPC is moderate capital appreciation over the next 15 – 25 years. Most importantly, I expect the company to maintain its track record of continuing to reward its shareholders with moderate annual dividend increases. This suits me just fine!

Note: I sincerely appreciate the time you took to read this post. As always, please leave any feedback and questions you may have in the “Contact Me Here” section to the right.

Disclosure: I do not currently hold a position in GPC but may initiate a position within 72 hours.

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.