🔥 Stock Idea: Genuine Parts Company
Investment case Genuine Parts Company
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Subscribe here and make sure you don't miss out.I have an interesting stock idea for you today: Genuine Parts Company.
Genuine Parts Company sells auto parts and industrial supplies.
We believe it’s currently trading at an attractive valuation level.
After missing earnings and reducing guidance, GPC is down 25% from its April highs.
Source: Finchat
Why did GPC miss earnings so badly?
GPC has been investing in new technology to improve the business
The company just made 2 large acquisitions
Sales in Europe and the industrial segment were lower than expected
The CrowdStrike outage impacted GPC
Hurricanes Helene and Beryl impacted a lot of their stores
Essentially, many things happened at once to create more costs and lower sales than normal.
1. Do I understand the business model?
Remember, we want a simple and attractive business model.
Genuine Parts Company sells auto parts and industrial supplies.
They buy parts from manufacturers and sell them to repair shops, businesses, and consumers. They also provide services like delivery and inventory management.
The business is split into 2 segments.
Automotive
Industrial
Automotive (62% of revenue)
This market is large and fragmented, with a total addressable market of more than $200 billion.
Most competitors are small, local stores.
The automotive segment is further divided into 2 sub-segments:
Commercial (80% of automotive revenue): Professional repair shops and garages - this is the “Do It For Me” segment
Retail (20% of automotive revenue): These are consumers making their own repairs - the “Do It Yourself” segment
Industrial (38% of revenue)
This is another large and fragmented segment with a total addressable market of more than $150 billion.
GPC has an impressive scale in the industrial segment.
In North America, our Industrial business stocks or distributes more than 19 million different items purchased from more than 47,000 different suppliers. - GPC 10-K filing
GPC says that most orders are filled immediately from existing stock and delivered within 24 hours.
They also provide “on-site solutions” to offer extra value to their customers.
GPC will manage inventory of maintenance parts and supplies for their customers, including RFID tracking.
They also offer services and repairs for specialties like gearboxes, pumps, hydraulic drive shafts, and electrical panels.
GPC’s Competitive Advantage
Distribution Network
There are more than 6,000 NAPA stores in the United States.
These stores are near installers, who make up 80% of GPC's auto parts customers.
Availability of parts and speed of delivery are important to mechanics and installers.
GPC delivers parts to its customers daily by truck.
When you’re trying to repair as many cars as possible, you can’t afford to waste time waiting on parts.
GPC also has over 750 industrial parts locations.
These locations are also close to customers, which helps them deliver parts fast.
Technological Investments
GPC is working to improve the digital experience for employees and customers.
They use technology to better price products, automate distribution centers, and simplify ordering parts.
Because GPC is so large and sells many parts, they have a lot of data to utilize.
2. Is management capable?
You want to invest in companies led by great managers.
Will Stengel has been the CEO of Genuine Parts Company since 2024.
He’s been with the company since 2019.
Before joining GPC, he served as president and CEO of HD Supply Facilities Maintenance.
Stengel has a 100% approval rating and 3.5 stars on Glassdoor - a good sign!
GPC’s ROCE has always been above 10%. This indicates management allocates capital well.
Source: Finchat
3. Has the company grown the dividend attractively?
You want to invest in companies with a history of growing their dividends.
The higher the dividend growth, the better.
Look for 2 things in the company’s dividend history:
At least 10 years of dividend growth
A 5-year record of growing dividends by 5% or more
GPC meets both of these criteria:
GPC is a Dividend King with 69 (!) years of dividend growth
They’ve grown their dividend payment by 5.7% per year over the past decade
Source: Finchat
4. Is the company active in an attractive end market?
You want to invest in companies that are in stable or growing market.
Here are a few characteristics we look for:
The company sells a necessary product
Recurring sales
A secular tailwind
GPC operates in 2 markets:
Automotive parts
Industrial parts
Automotive parts
The automotive parts market is projected to grow between 2% and 5% per year.
Maintenance and repair parts are both necessary and recurring purchases, making this market attractive.
Positive trends driving growth include:
More miles driven per year
The average age of vehicles on the road is increasing
New car inventory remains limited
Industrial parts
The industrial maintenance and repair market looks very similar to auto parts.
It’s expected to grow around 3% per year as well.
The industrial sector is quite large - it’s second in energy use behind transportation in the US.
Key trends driving growth include:
The need to reduce costs and improve quality is increasing automation and creating more complex machinery, which requires more parts and maintenance.
Unplanned downtime is very expensive for manufacturing plants.
According to Forbes, the average manufacturer experiences 800 hours of equipment downtime each year—over 15 hours each week.
When a manufacturing line stops, the average automotive manufacturer loses $22,000 per minute.
There is a growing focus on sustainability, leading to more repairs instead of replacements.
The nearshoring trend is bringing manufacturing closer to where products are sold, moving more production from Asia to GPC’s existing markets like Mexico, the U.S., and Europe.
5. What are the main risks for the company?
Disruption is the worst enemy of every long-term investor.
When you invest in a company that is losing its moat, you’ll end up with horrible investment results.
GPC’s main risks include
A lot of competition
Advance Auto Parts
AutoZone
O’Reilly
Grainger
Fastenal
Macroeconomic factors
Lowered consumer spending
Deferred maintenance
Electric vehicles
May need less parts
Changes in travel patterns
People driving less
Increased use of ride-share services like Lyft and Uber
Addressing the risks
Every company faces risks.
Let’s address why we expect GPC to do well moving into the future, despite these risks.
Competition
GPC sells 80% of its auto parts to professionals.
For companies like AutoZone, O’Reilly and Advance Auto Parts it’s the exact opposite. Most of their sales are to the DIY consumer, so GPC doesn’t directly compete with them.
In the industrial space, GPC has a very large network and is investing in technology to be more efficient in stocking and delivering parts.
We expect this to allow them to compete very effectively with companies like Grainger and Fastenal.
Electric Vehicles
Electric vehicle sales are increasing, but they still represent a small portion of all cars on the road.
The chart below includes both fully electric vehicles and plug-in hybrids.
Globally, less than 5% of cars are electric.
In the U.S., that number is under 2%.
The runway for auto parts sales still looks quite long.
Now let’s dive into the most important part: the Fundamentals.
6. Does the company have a healthy balance sheet?
Invest in financially healthy companies.
A strong balance sheet helps companies share profits with shareholders, stay flexible, and take advantage of opportunities.
Companies that often return money to shareholders are usually stable, so some debt is acceptable.
We typically like to see a Debt/Equity ratio of less than 50%.
GPC currently has a Debt/Equity ratio of >1.
Source: Finchat
You can see the ratio increased a lot in 2017.
GPC increased its debt a lot that year to acquire Alliance Automotive Group, a leading distributor of automotive parts in Europe.
Since then, GPC has made other acquisitions to move into the industrial parts market and to diversify from the US into other geographies, like Europe, Australia, and Southeast Asia.
Are the debt levels safe?
The reason we’re interested in debt is because it can bankrupt a company.
So the question is, does GPC’s debt pose a danger to the survival of the business?
We look at a few ratios to get an idea:
Interest coverage ratio: this tells us if GPC can afford the interest payments
Current ratio: tells us if they might have trouble meeting upcoming debt obligations
FCF / Debt: Tells us how easy it would be to pay off the debt with existing cash flow
Here’s how they look for GPC:
Interest coverage ratio: 20.2x
Current ratio: 1.2x
FCF / Debt: 0.2x
With 20x interest coverage, a current ratio above 1, and the ability to pay all the debt off with Free Cash Flow in 5 years, GPC’s debt levels look fairly safe.
Especially considering that GPC generates a lot of Free Cash Flow:
Source: Finchat
7. Is the company a great capital allocator?
Capital allocation is management’s most important task.
When a company generates cash, management has 5 capital allocation choices:
The most important things you want to see as a dividend investor?
Payout Ratio < 60%
Effective use of buybacks
The Payout Ratio shows how much of a company’s earnings are paid out as a dividend.
If this ratio is too high, the company might cut the dividend or not invest enough in future growth.
With the exception of 2020, GPC has maintained a conservative payout ratio.
GPC is a mature company, so the years where the payout ratio is slightly above 60% aren’t a big worry.
Source: Finchat
GPC does not buy back a lot of shares, but we can look at returns on capital to determine if their increase in debt in 2017 was a good capital allocation decision.
While this metric did drop from 2016 to 2020, it has been above 10% since the pandemic.
A Return on Total Capital above 10% for a large and mature company like GPC is attractive, so we feel that management is allocating capital well.
Source: Finchat
8. How does the past and future growth of the company look?
To continue growing the dividend, the company needs to report earnings growth.
Look for companies that have grown their revenue and earnings by at least 5% per year.
GPC does not quite meet our 5% growth target, but they’re very close.
Revenue Growth: 4.4%
Net Income Growth: 4.5%
Source: Finchat
9. Can the company grow dividends into the future?
Over time, you want to receive regular, growing dividend payouts.
Look for a history of increasing payments to shareholders, a reasonable dividend yield, and a payout ratio that isn’t rising too quickly.
Current yield: Aim for a dividend yield at least equal to the S&P yield (1.3%). A yield of 1.5 times the S&P is even better.
Payout ratio: < 60%.
Here’s how the numbers look for GPC
Current yield: 3.3%
Payout ratio: 50.6%
GPC has also grown its dividend by more than 5% per year for the last decade
Source: Finchat
10. Does the company trade at a fair valuation level?
We always use 3 methods to value a company:
A comparison of the dividend yield with its historical average
An Earnings Growth Model
Reverse Dividend Discount Model
A comparison of the dividend yield with its historical average
A higher-than-average yield indicates that the company might be undervalued.
GPC’s dividend yield is significantly higher since the stock price dropped after the last quarterly earnings report.
This indicates that GPC may be undervalued.
Source: Finchat
An Earnings Growth Model
This shows us the yearly return we can expect from a company.
It takes into account Earnings Per Share growth, the dividend yield, and multiple contraction or expansion.
The formula looks like this:
Expected return = EPS Growth + Dividend Yield + Multiple Expansion (or contraction).
Here are the numbers for GPC:
EPS Growth: 7% per year (equal to the 5-year CAGR)
Dividend Yield: 3.3%
Change in PE: PE to remain flat at 16x earnigns
Expected return = 7% + 3.3% + 0% = 10.3% return per year
A Reverse Dividend Discount Model
As Charlie Munger says, “Invert, always invert!”
Solving complex problems is often easier backward. That’s exactly what we do with the Reverse DDM.
Solving the DDM for growth tells us how much dividend growth is priced in by the market.
Here’s the formula:
Expected growth = Required return – (DPS next year / Current share price)
Let’s put some numbers in for GPC:
Required return: 10%
DPS next year: $4.20 (5% growth)
Current share price: $123
Expected growth = 10% - ($4.20 / $123) = 6.6%
This tells us that the market is pricing in a 6.6% growth in GPC’s dividend
5-year DPS CAGR: 5.6%
Dividend Score
Now let’s bring everything together and form a conclusion about Genuine Parts Company.
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TJ
Used sources
Interactive Brokers: Portfolio data and executing all transactions
Finchat: Financial data