Summary

  • Strong Q2 results recently reported and projected earnings for FY2018 reaffirmed.
  • Shareholder returns on the basis of dividends reinvested over the past 20 years are almost double that of the S&P500.
  • Share price has risen ~10% from the level at which my previous article indicated shares were attractively valued. Despite this increase, shares are still attractively valued.

Introduction

On April 19th I wrote that the ~18% pullback in this company’s stock price subsequent to its late January 2018 high should be viewed as an opportunity to acquire shares in this company at a more reasonable valuation.

Subsequent to that article, this company’s stock price has risen ~10%. While this company is no longer as attractively valued as 3 months ago, shares are still reasonably valued based on the company’s growth opportunities.

This company will likely appeal to investors desiring a steadily increasing dividend income stream. The annual dividend has been increased for more than 60 consecutive years (qualifies as a Dividend King which is a company with 50+ consecutive years of dividend increases) and the dividend’s compound annual growth rate over the past 10 years is in excess of 6%.

In addition to dividend increases, this company has repurchased in excess of 57.5 million shares for a total of ~$2.6B since 1994. These shares have been repurchased primarily with earnings generated through normal business operations versus other companies which have loaded up their balance sheet with debt for the purpose of repurchasing shares.

The company prudently manages its working capital and its after-tax return on invested capital exceeds its weighted average cost of capital by 7%.

I have written a few articles about this company with the most recent two articles here and here being accessible to Financial Freedom is a Journey subscribers.

Recent Events

In my April 19 article I touched upon the proposed combination of GPC’s small Business Products (SPR) group with Essendant (NASDAQ: ESND). Staples owner Sycamore Partners, however, holds a ~9.9% stake in ESND and is attempting to acquire the entire SPR business.

On the June 19th Q2 analyst call, management indicated this segment reported flat sales which was a vast improvement from the 5% decrease recorded in Q1. The business faces headwinds in the demand for traditional office products but diversification into the facilities, break room and safety supplies category is offsetting some of these headwinds.

GPC continues to work toward the closing of its definitive agreement with ESND and subject to regulatory and ESND shareholders' approval, GPC continues to expect to successfully close on the agreement.

On June 7, 2018, GPC announced that its Alliance Automotive Group in Europe had entered into a definitive agreement to acquire German Hennig Fahrzeugteile Group. The Press Release regarding this acquisition can be found here with the only slight change being that this transaction is now expected to close in the September – October timeframe.

Q2 2018 Financial Results and Guidance

GPC’s July 19, 2018 Q2 Earnings Release can be found here.

While no Earnings Presentation has been provided with the Q2 Earnings release, I encourage you to review GPC’s May 2018 ‘Celebrating 90 Years’ Investor Presentation.

Sales guidance has been increased by 13% - 14% versus previous guidance of a 12% - 13% increase.

Diluted EPS of $5.49 - $5.64 and adjusted diluted EPS (excludes any transaction-related costs) of $5.60 -$5.75 continue to be expected.

A tax rate of ~25% for 2018 is now expected versus the previously expected ~26%.

On the July 19 analyst call, management indicated total sales were a record $4.8B driven by the favorable impact of strategic acquisitions and a 3.4% comp sales increase; this comp increase improved from ~2% in Q1.

Net income was $0.227B and $1.54 of EPS was also a new record. Excluding the impact of transaction and other cost related to the acquisition of Alliance Automotive Group and the agreement to spin off the Business Products Group (SPR), adjusted net income was $0.234B, up 23%, and adjusted EPS was $1.59, also up 23%.

After a slow start to FY2018, which management attributes largely to the cold and wet conditions at the start of spring, GPC’s sales were much improved in May and June. Sales to retail customers continue to outpace sales to the commercial segment although commercial comps were improved from Q1 and reflect GPC’s strongest results over the past 9 quarters.

There has been an improvement in GPC’s U.S. Automotive comp sales in Q2 and demand across the aftermarket is expected to continue to strengthen.

Management is seeing a positive shift in demand for failure and maintenance parts due to the continuing impact of more normalized winter weather patterns and the record heat across much of the U.S. so far this summer. In addition, the number of vehicles in the aftermarket sweet spot is expected to become a tailwind in 2019 and 2020.

The long-term fundamental drivers for the automotive aftermarket remain sound with a growing total and aging fleet and an increase in miles driven among consumers.

Ongoing acquisitions and overall footprint expansion should also contribute to future sales.

The international Automotive businesses in Canada, Mexico, Europe and Australasia delivered a 2nd consecutive quarter of 6% total sales growth, including a 2% comp sales increase and accounted for approximately 40% of GPC’s total Automotive revenues.

The recent addition of the Alliance Automotive Group (AAG) is generating strong results across its European footprint in France, the U.K., Germany and Poland. It continues to benefit from ongoing acquisitions and remains on plan for both sales and profit.

AAG's acquisition strategy resulted in additional bolt-on acquisitions in Q2 and in early June there was the announcement of the addition of the Hennig Fahrzeugteile Group, a leading supplier of light duty and commercial vehicle parts with 31 branches across Germany. This addition is expected to generate annual revenues of ~$0.19B and closing of the transaction is expected in the September-October timeframe.

On a segment by segment basis, management expects:

  • Automotive - plus 21% - plus 22% total sales growth versus previous guidance of plus 19% - plus 21%;
  • Industrial - plus 6% - plus 7% total sales growth versus previous guidance of plus 4% - plus 5%;
  • Business Products - minus 3% - minus 4% which is unchanged from previous guidance. This segment continues to be included in management’s guidance until the spinoff transaction is closer to completion.

Management has indicated a key area of focus is to improve its Automotive segment margin and specifically in the U.S. operations. Rising costs in several areas have continued to offset savings initiatives so efforts to eliminate even more costs while continuing to provide exceptional customer service are ongoing.

Total debt of $3.2B as at the end of Q2 is consistent with debt at the end of Q4 2017 and Q1 and is elevated from historical levels due to borrowings for the AAG acquisition in Q4 2017.

Debt arrangements vary in maturity and the average interest rate on total debt stands at 2.98%. GPC has a strong balance sheet and has the financial capacity to support the company’s growth initiatives.

GPC has generated $0.455B in cash from operations for the first 2 quarters in FY2018. Cash flows continue to support ongoing priorities for the use of cash so as to maximize shareholder value.

Management continues to project cash from operations in the $0.950B - $1B range and free cash flow of ~$0.4B for the current fiscal year.

Valuation

At the time of my April 19th article, GPC was trading at ~$88.15. Based on management’s $5.60 - $5.75 FY2018 adjusted diluted EPS projection, GPC’s forward PE was ~15.3 - ~15.75.

GPC’s stock price has subsequently risen to ~$98 and with no change to adjusted diluted EPS guidance the forward PE range is ~17 - ~17.5. While not as attractively valued as 3 months ago, GPC shares are still fairly valued.

Dividend, Dividend Yield, and Dividend Payout

GPC’s dividend history can be found here and its stock split history can be found here.

GPC highly values its status as a Dividend King; these are companies which have increased their annual dividend for at least 50 consecutive years.

GPC - Dividend Growth

Source: GPC Investor Presentation May 2018

With GPC’s stock now trading at ~$98 and the annual dividend being $2.88, the forward dividend yield is has dropped to ~2.9% from the ~3.26% at the time of my previous article.

GPC’s ~50% dividend payout ratio is based on the ~$5.68 mid-point of the FY2018 adjusted diluted EPS projection.

GPC’s 10 and 20 Year Performance Versus S&P500

GPC’s performance relative to the S&P 500 over the past 10 and 20 years on the basis of dividends reinvested/not reinvested is:

GPC vs SP500 10 year return comparison

GPC vs SP500 20 year return comparison

Source: Tickertech

Share Repurchases

GPC has not purchased any of its common stock in 2018 and currently has 17.4 million shares authorized and available for repurchase. No set pattern for these repurchases has been set but GPC expects to be active in the program over the long term since management continues to believe GPC’s stock is an attractive investment and when combined with the dividend, provides the best return to shareholders.

Final Thoughts

GPC is no longer as attractively valued as it was 3 months ago but shares still appear to be fairly valued which should appeal to long-term investors.

I view the company as being well managed with the prudent management of the company’s working capital being an attractive feature. I expect GPC will continue to generate strong and steady cash flow which should enable management to meet its following commitments to shareholders:

  • Reinvestment in Businesses
  • Acquisitions
  • Dividends
  • Share repurchases

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

Thanks for reading!

Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected]

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.