In this article, let's take a look at Genuine Parts Co (GPC, Financial), a $13.75 billion market cap company, which is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies and office products.
Leading position
The company operates several intermediary distributors that compete in the automotive (57% of total segment profits), industrial (28%), office (11%) and electrical (4%) markets. Although it has a leading position in the industry, the firm represents only about 5% to 6% of the highly competitive, cyclical, and fragmented automotive aftermarket, which the company believes it is a growing $90 billion market.
Great part of revenues comes from these businesses. For this year, we expect that automotive demand to increase due to the scenario of lower interest rates, improved credit availability and economic expansion.
The competition is fierce from several vertically integrated competitors that are generating high incremental returns from industry consolidation.
NAPA is very important, with the successful sales mix of generating a 70/30 do-it-for-me/do-it-yourself. We believe NAPA will gain share because of its leading brands and cost advantage. Other domestic market like the DIFM presents growth opportunities if it is capable to capture market share.
Expansion
The company´s acquisitions are a strategy to expand in markets and regions. The target is subscale players. For example, the acquisition of Exego has opened up growth opportunities in Australasia, where is free from domestic competitors.
Dividend policy
Genuine Parts has an attractive dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 2.62%, which is quite good to protect the purchasing power, especially considering the consistency of track-record dividends payments (more than 50 years of consecutive dividend growth) and favorable expectations regarding dividend growth.
Revenues, margins and profitability
Looking at profitability, revenue grew by 6.32% but earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($1.28 vs $1.39). During the past fiscal year, the company increased its bottom line. It earned $4.41 versus $4.15 in the previous year. This year, Wall Street expects an improvement in earnings ($4.60 versus $4.41).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| GPC | Genuine Parts | 20.59 |
| DIT | Amcon Distributing Co | 8.76 |
| LKQ | LKQ Corp | 15.27 |
| WEYS | Weyco Group Inc | 9.45 |
| POOL | Pool Corp | 35.10 |
| CRV | The Coast Distribution System Inc | -2.63 |
| Â | Industry Median | 7.81 |
The company has a current ROE of 20.59% which is higher than the industry median and the ones exhibit by Amcon Distributing (DIT, Financial), LKQ (LKQ, Financial), Weyco (WEYS, Financial) and The Coast Distribution System (CRV, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Pool Corp. (POOL, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 19.7x, trading at a discount compared to an average of 21.3x for the industry. To use another metric, its price-to-book ratio of 3.8x indicates a premium versus the industry average of 1.43x while the price-to-sales ratio of 0.9x is above the industry average of 0.67x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $28.270, which represents a 23.1% compound annual growth rate (CAGR).
Final comment
In the U.S. automotive segment, the company operates under the NAPA brand. This segment consists of more than 60 distribution centers that supply more than 400,000 parts. The firm´s scale give good bargaining power over suppliers, negotiating lower acquisition costs.
The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like Jim Simons (Trades, Portfolio), Murray Stahl (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as Manning & Napier Advisors, Inc. and Pioneer Investments (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
