Genuine Parts Company (GPC) released Q2 2019 results on July 18, 2019. Guidance for FY2019 has been lowered and corrective action is being taken to improve results.

With the ~$7 pullback in GPC's share price following the release of results on July 18th, I now view GPC as fairly valued despite lower earnings expectations.

Summary

  • A continued increase in the average age of vehicles and in continued miles-driven growth should act as a tailwind to GPC’s auto-parts division.
  • The automotive and industrial parts industries should consolidate around larger industry participants due to their superior levels of component availability.
  • Factors such as the weather and fuel prices can meaningfully impact short-term demand for GPC’s products.
  • Management is not pleased with recent results. A multi-year project to optimize the portfolio so as to be well positioned for sustained long-term growth is organizational restructuring the consolidation of facilities is currently underway.
  • Following the release of Q2 2019 results, lowered FY2019 guidance, and a pullback in GPC’s share price I view shares are fairly valued.

Introduction

When I analyzed Genuine Parts Company (GPC) in my February 19th article I wrote how GPC had improved its:

  • Working Capital
  • Working Capital Efficiency
  • Compressed Cash Conversion Cycle

and had produced steady and strong cash flows.

At the time of that article, shares were trading at ~$109 and based on FY2019 guidance I came to the conclusion that shares were too expensive for me to increase my position. GPC’s share price subsequently increased to ~$115 in early April at which time I suggested there was reason for caution as I was of the opinion GPC was far too expensive based on guidance.

With the release of Q2 2019 results which fell short of expectations and lowered guidance for FY2019, GPC’s share price has now dropped to ~$96 as I compose this article.

I previously viewed GPC as overvalued but following the drop in the share price and lowered guidance I now take a look at whether GPC represents a buying opportunity for long-term investors.

Investment Thesis

GPC, incorporated on May 7, 1928, is a leading service organization engaged in the distribution of automotive replacement parts, industrial parts and materials, and business products.

In FY2018, business was conducted from more than 3,100 locations throughout North America, Europe, Australia and New Zealand and it employed ~50,000 worldwide.

For a company which operates in a less than ‘sexy’ industry it certainly has managed to reward long-term investors. Looking at GPC’s Investor Day presentation we see:

  • Increased sales in 86 of the last 91 years;
  • Increased profitability in 75 of the last 91 years;
  • 63rd consecutive years of dividend increases.

If we look at the extent to which GPC has rewarded investors relative to the S&P500 over the past ~24 years we see that GPC’s return exceeds that of the S&P500 if dividends were continually reinvested; the S&P500’s return, however, exceeds that of GPC when dividends are not automatically reinvested.

June 4 2019 Investor Day

At GPC’s recent Investor Day management discussed the company’s multi-year efforts to optimize the portfolio so as to be well positioned for sustained long-term growth.

The following are a few key points of this presentation.

GPC expanded its automotive footprint beyond North America and into Australasia 6 years ago. This group has performed very well and has added significant value. Since 2017, GPC has added 45 acquisitions to its portfolio and these acquisitions have generated $3B in incremental revenue.

The majority of these new businesses have represented strategic bolt-on acquisitions but GPC has recently taken advantage of more significant opportunities:

  • the entree into Europe in late 2017 via the acquisition of Alliance Automotive and subsequent key strategic acquisitions in 2018 and 2019;
  • the recently announced industrial expansion into Australasia with the purchase of the remaining interest in Inenco - GPC had originally purchased a 35% stake in Inenco in 2017 and held the opportunity to acquire the balance of the company at a later date.

In addition to expansionary initiatives, GPC has taken steps to streamline operations. In 2018, it consolidated its electrical business into Motion Industries to build a larger, stronger, and more cost-effective industrial business. In 2019, GPC consolidated several automotive operations representing the in-house supply network in NAPA to a more efficient North American automotive supply chain.

In addition, GPC divested itself of its legacy automotive business in Mexico Auto Todo earlier in 2019 to more effectively focus on the growth potential of the NAPA Mexico model established a few years ago.

GPC’s immediate focus is on the execution of the initiatives to control costs and improve profitability and while GPC has had some success in this regard through our investments in technology and automotive supply and industrial realignments, management has indicated that GPC has yet to fully realize the savings required to outpace the pressures of rising costs and the increase in the spend for necessary investments.

As a result, GPC is accelerating its ongoing cost savings plans and is developing aggressive expense reduction initiatives to more effectively address cost structure, to drive meaningful savings and to ultimately deliver incremental value.

Based on my years of experience this typically involves changes on the personnel front and, not surprisingly, GPC’s management has indicated that it has identified opportunities to restructure and consolidate several functional areas and facilities, reducing both personnel and occupancy cost.

Accompanying these HR changes will be the need to aggressively drive incremental revenue growth by capturing a greater share of wallet from existing customers, securing new business opportunities, driving the digital strategy securing additional bolt-on acquisitions.

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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.

Disclosure: I am long GPC.

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.