Summary

  • GPC reported strong FY2017 results on February 20, 2018 but the stock price pulled back ~5.2% as the stock was overvalued.
  • The EIS and Motion businesses have been combined into one $6B industrial group as of the beginning of 2018. The rationale for combining these two segments is to provide economies of scale and greater efficiencies.
  • GPC is now providing investors with a ~3.04% dividend yield after the recently announced 6.7% increase in the dividend to $2.88/year and the ~5.2% pullback in the stock price.

Introduction

I previously wrote about Genuine Parts Company (NYSE: GPC) here, which is when I decided to initiate a position, and here, which is when I suggested the pullback was another opportunity to invest in the company.

On February 20, 2018, GPC released its Q4 and FY2017 results and provided FY2018 guidance. The stock pulled back ~5.2% subsequent to the release of the results and in this post I review whether GPC is reasonably valued to warrant a further investment in the company.

Impact of the Tax Cuts and Jobs Act (TCJ) on GPC

GPC has indicated it expects its tax rate in FY2018 will be ~26% - 27% with provisional tax savings resulting from the tax reform that are currently estimated to be ~$80 million - ~$90 million.

Q4 and FY2017 Financial Results and FY 2018 Outlook

GPC’s February 20, 2018 Earnings Release can be found here.

FY2017 revenue was $16.3B versus $15.3B in FY2016; this is a 6.3% increase. Net income for the same period was $0.617B with diluted EPS of $4.18.

Alliance Automotive Group (AAG), the company GPC acquired for ~$2B in November 2017, contributed 1.7% to sales and $0.07 in diluted EPS for the year.

AAG is the second largest parts distribution platform in Europe, with a focus on light vehicle and commercial vehicle replacement parts. When acquired, it was headquartered in London, and had ~8,000 employees and 2,100 company-owned stores and affiliated outlets across France, the U.K., Germany and Poland.

The AAG acquisition was financed with a syndicated credit facility which explains why GPC’s long-term debt increased to $2.6B (December 31, 2017) from $0.550B as of December 31, 2016.

Genuine Parts had cash and cash equivalents of $315 million as of Dec 31, 2017, up from $243 million as of Dec 31, 2016.

In FY2017, GPC acquired 15 businesses with ~$2.1B in annual revenues; ~$1.7B in sales is generated by AAG. Another ~$0.15B in sales is generated by 3 other businesses GPC acquired in the Q4.

While the Automotive and Industrial segments of GPC generated Operating Profit growth, the smaller Business Products (S.P. Richards) group is challenged in that it continues to experience pressures from traditional office supplies competitors. Results reflect the continuation of challenging trends and the changing landscape of the office products industry and GPC is continuing to evaluate the long-term outlook for this business.

GPC’s Electrical/Electronic Materials (EIS) group experienced an 8.9% growth in sales in Q4. This was driven by the addition of Empire Wire and Cable which GPC acquired in April 2017. GPC views Empire as an important strategic acquisition as it further expanded EIS's wire and cable offering and strengthens its capabilities to serve the industrial robotic and automation markets. This ties in well with Motion Industries’ expansion in this sector; it acquired Braas in 2016 and Numatic Engineering in 2017.

The EIS and Motion businesses have a growing number of common attributes including their product offering, suppliers, and customers. Given this, GPC’s management announced at the beginning of 2018 that the EIS operation would be combined with the Motion and Industrial Parts group.

Starting with Q1 2018, EIS will be identified as Motion's electrical specialties group. The rationale for combining these two segments is to provide economies of scale and greater efficiencies (ie. the sharing of talent, physical resources, scale, and value added expertise). This will now be one $6B industrial group.

Furthermore, GPC made a minority investment in Inenco Group in April 2017; this will fall under the industrial group. Inenco is a market leading industrial distributor in Australasia and GPC’s management views this investment as an entry into growing markets like Indonesia, Malaysia, and Singapore; GPC plans to add this to its industrial platform within the next 12 - 24 months.

Free Cash Flow (FCF)

On the February 20, 2018 conference call with analysts, GPC’s EVP & CFO indicated the company’s balance sheet will remain a key strength.

In FY2017, GPC generated $0.815B in cash from operations and FCF (excludes capital expenditures and the dividend) was $0.253B.

GPC has forecast that it will generate ~$0.95B - $1B in cash from operations and ~$0.4B in free cash flow (FCF).

Management’s priority for the use of this cash continues to be the dividend, reinvestment in the various GPC businesses, share repurchases, and strategic acquisitions.

Valuation

FY2017 Diluted EPS (GAAP) and adjusted Diluted EPS (Non GAAP) amounted to $4.18 and $4.64 respectively. Management has projected FY2018 diluted EPS in the $5.60 - $5.75 range which represents a ~20.7% - ~24% increase from FY2017’s adjusted Diluted EPS.

GPC closed at ~$94.70 on February 20, 2018 so based on FY2018’s adjusted EPS range, shares are currently trading at an adjusted PE of ~16.5 - ~17.

Prior to the pullback, GPC was trading ~$100. Based on the Diluted EPS and adjusted Diluted EPS figures reflected above, GPC’s PE was ~24 on a GAAP basis and ~21.6 on a non GAAP basis. These levels were somewhat elevated relative to historical levels but with the ~5.2% pullback in GPC’s share price on February 20, 2018, I now view GPC as fairly valued.

Dividend, Dividend Yield, and Dividend Payout Ratio

GPC’s dividend history can be found here and its stock split history can be found here. GPC has paid a cash dividend every year since going public in 1948 and 2018 marks the 62nd consecutive year of increased dividends paid to shareholders. This qualifies GPC to be a member of the elite Dividend King group of companies; these are companies which have increased their annual dividend for at least 50 consecutive years.

On February 20, 2018, GPC announced a 6.7% increase in the regular quarterly cash dividend for 2018, and increase from $2.70/share annually to $2.88/share annually. The first $0.72/share quarterly dividend is payable April 2, 2018 to shareholders of record March 9, 2018.

GPC’s dividend compound annual growth rate (CAGR) is reflected below for two different timeframes.

With GPC’s stock now trading at ~$94.70, the forward dividend yield is ~3.04%.

FY2018’s $2.88 forward annual dividend is ~69% of GPC’s FY2017 Diluted EPS (GAAP) of $4.18/share but is only ~62% of its $4.42 adjusted Diluted EPS (Non GAAP). The new $2.88 annual dividend will represent a dividend payout ratio of ~50% - ~51.4% based on the projected adjusted Diluted EPS range of $5.60 - $5.75 for FY2018.

Share Repurchases

GPC purchased 1.9 million shares of its common stock in FY2017 and it has 17.4 million shares authorized and available for repurchase. There is no set pattern for these repurchases but management has indicated it expects to remain active in the program in the periods ahead.

GPC’s weighted average number of diluted shares outstanding (in millions) was 147.7 (FY2017), 149.8 (FY2016), 152.5 (FY2015), 154.38 (FY2014), 155.71 (FY2013), and 156.42 (FY2012).

Final Thoughts

I am of the opinion that investors bid up GPC’s stock price to a level that resulted in the stock being overpriced. The ~5.2% pullback on February 20, 2018 and the recently announced 7% increase in the quarterly dividend now makes GPC an attractive investment for investors seeking dividend income and capital gains potential.

I fully intend to acquire additional GPC shares within the next 72 hours.

I hope you enjoyed this post and 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.