2023-06-27 01:41:45 ET
Summary
- Genuine Parts Company is expected to benefit from long-term secular demand trends, strategic M&As, and good execution, making it a good investment opportunity.
- GPC's end markets are supported by various secular trends, such as the emerging electric vehicle market, onshoring manufacturing, and increasing automation across businesses.
- The company's stock is currently trading below its historical averages, making it an attractive buy with promising growth prospects and an attractive dividend yield of 2.38%.
Investment Thesis
The Genuine Parts Company (GPC) is well-positioned to deliver sales growth supported by long-term secular demand trends in its end markets such as aging vehicles, increasing miles driven, the complexities of advancing car models, the emerging electric vehicle market, the reshoring of U.S. manufacturing, and the increased need for automation and robotics. Additionally, the company should also benefit from strategic M&As and good execution.
On the margin front, the company is expected to benefit from price increases, moderating inflation, and improved productivity through cost-efficiency measures. The company's stock has seen a slight correction since my previous coverage due to macro uncertainty and in response to worse-than-expected earnings results for one of its peers. This dip in the stock price presents a good opportunity for investment, as the company is now trading below its historical average P/E multiple. Therefore, considering the lower-than-historical valuation and strong growth prospects, I maintain a buy rating on the stock.
Revenue Analysis and Outlook
In my previous article , I discussed the promising growth prospects for GPC, highlighting the company's strong demand for replacement products and services. Since then, the company has reported its first-quarter results for 2023, which showed similar positive dynamics. However, despite these positive developments, the stock price experienced a recent correction due to broader macro uncertainty and worse-than-expected earnings results from one of its peers - Advance Auto Parts ( AAP ) - which drove correction in the broader automotive parts retailers.
During the first quarter of 2023, GPC maintained its sales growth momentum. The company benefited from robust demand for automotive replacement parts, driven by an aging vehicle fleet. Additionally, the industrial segment experienced strong demand, particularly for its Motion brand. As a result, the company achieved an 8.9% year-over-year increase in revenue, amounting to $5.8 billion. Acquisitions contributed 2.4 percentage points to this growth, while foreign exchange rates had a 2.2 percentage point negative impact. Excluding the effects of acquisitions and foreign currency, comparable sales (organic sales) increased by 8.7% year-over-year.
Looking ahead, I am confident that the company should continue to achieve strong revenue growth, benefiting from secular demand trends supporting its end markets, the emerging electric vehicle market opportunity, and its M&A strategy.
GPC's end markets in both segments are supported by various secular trends that should drive sustained demand for years to come. In the Automotive segment, the ongoing increase in miles driven globally following the economic reopening is a significant trend that should support the company's long-term sales growth. As people have increasingly relied on automobiles as their primary mode of transportation, particularly in the post-COVID era, there is a growing demand for repair and replacement parts, fueling the company's sales growth.
Furthermore, the average age of vehicles is steadily rising. According to a study by S&P Global , the average age of passenger cars has increased meaningfully over the last decade and is currently at 13.6 years. While new car supply is improving, chip shortages, manufacturing complexities, and global logistics challenges are expected to continue, leading people to invest in their existing vehicles. This trend should continue to provide a tailwind for the industry. Additionally, as new car models become increasingly complex, individuals are finding it more challenging to perform repairs themselves. This drives demand for the company's Do-It-For-Me (DIFM) business. Therefore, these secular trends in the global automotive industry will support GPC's sales growth going forward.
Moreover, the emerging electric vehicle (EV) market presents a significant opportunity for the company's sales growth in the coming years. Currently, EVs represent only 1% of the total car fleet in the U.S., but management expects this figure to increase to 8% by 2030. This provides a pipeline of opportunities for GPC to diversify its business portfolio by selling parts for both EVs and combustion engine vehicles. The company is actively working on relevant parts, training, access to information and services, and equipment through its NexDrive brand to support growth in the EV market. For example, GPC has introduced an exclusive offering of Brembo brakes, which is the OE supplier for Tesla ( TSLA ). These offerings in the U.S. aftermarket should help the company gain market share in the EV aftermarket and drive sales growth. Additionally, GPC has already established 150 NexDrive points of sale in Europe in 2022, where EVs account for 2% of the car market, and aims to reach 500 points of sale by the end of 2023. This demonstrates the strength of the company's EV offering in the European market. Therefore, the launch of new EV parts presents a significant opportunity in the global automotive aftermarket and should act as a long-term tailwind for the company's sales growth.
Turning to the Industrial segment, demand is supported by secular trends such as onshoring manufacturing, increasing automation across businesses, and federal infrastructure investments. The pandemic and related supply chain disruptions have prompted the United States to bring manufacturing back into the country to ensure self-sufficiency. Government incentives like CHIPS and the Science Act are driving investments in semiconductors, energy, battery storage, and mining, further promoting onshoring. This creates a positive secular tailwind for the company's industrial operations.
Moreover, due to labor shortages and the increasing need for driving cost efficiencies, businesses across industries are enhancing and upgrading their digital infrastructure through automation, robotics, and AI as Automation technologies offer a way to bridge this gap by replacing tedious repetitive, and dangerous manual labor with more efficient, reliable and safe automated systems. In addition, due to shifting consumer behavior, industrial manufacturers are seeking automation to optimize their operations to better manage supply and demand, which is also boosting opportunities in the automation market. Lastly, the emerging EV market should also aid the industrial segment through the increasing need to build EV manufacturing factories and battery plants.
Both segments of GPC are well-positioned to benefit from these secular trends in their respective end markets. Further, GPC should also benefit from strategic bolt-on M&A activities. GPC frequently engages in small tuck-in acquisitions on a quarterly basis and also pursues larger acquisitions once in a while, such as the Kaman Distribution Group (KDG) in 2022. The aim of these acquisitions is diversification from single-end markets to multiple-end markets, which increases the company’s resilience in uncertain macroeconomic environments. With a leverage ratio of 1.7x exiting Q1 2023, GPC is well-equipped to support its M&A strategy, further strengthening and diversifying its end markets. Therefore, I remain optimistic about GPC's sales growth prospects. The company aims to grow at ~6-7% CAGR and achieve $26.5 billion to $27 billion in revenue by the end of 2025, driven by secular trends in the end markets, its M&A strategy, and good execution. I believe this target is attainable.
Margin Analysis and Outlook
As anticipated in my previous article , GPC successfully achieved margin expansion in the first quarter of 2023. The company's focus on good pricing strategies and cost-saving measures played a key role in this achievement. GPC effectively implemented cost savings and implemented price increases, which more than offset challenges arising from higher outbound freight costs, foreign exchange impacts, an unfavorable mix shift in the industrial segment, inflationary wage conditions, and increased technology spending. Consequently, GPC experienced a year-over-year gross margin growth of 30 basis points, reaching 34.9%, and a total segment profit margin growth of 50 basis points, reaching 9.1%.
Looking ahead, I believe that GPC should continue to expand its margins. Although inflationary costs associated with freight and labor wages remained elevated compared to the previous year, the company has started seeing a moderate sequential improvement and management expects inflation to further moderate. In the first quarter, the Automotive segment experienced high-single-digit inflation, while the Industrial segment saw low single-digit inflation. Management is expecting the company will close out the year with Automotive segment inflation declining to mid-single-digit levels and Industrial remaining at low-single-digit levels. This anticipated moderation in inflation should continue to support margin expansion.
Furthermore, GPC is actively investing in its pricing initiatives to effectively manage pricing in line with growing demand. These efforts should contribute to margin growth. The company is also committed to driving cost efficiencies by optimizing its supply chain network and leveraging advanced technology in day-to-day operations. For instance, in the Automation end market, GPC is focusing on integrating its distribution, fulfillment, transportation, store, and supplier networks to save costs.
Moreover, GPC is embracing data analytics, AI, and cloud-based systems as part of its transition to modern technology platforms. The company has partnered with Google to leverage its cloud services and AI tools, enabling GPC to optimize back-office processes and lower service costs. These investments in IT infrastructure and supply chain should enhance productivity, drive cost efficiencies, and contribute to margin growth. Overall, I maintain an optimistic outlook on GPC's margin growth prospects.
Valuation and Conclusion
GPC is currently trading at a price-to-earnings (P/E) multiple of 17.64x based on the FY23 consensus estimate of $9.05, and a P/E multiple of 16.35x based on the FY24 consensus EPS estimate of $9.77. These valuations are below GPC's historical 5-year average forward P/E of 18.64x. Furthermore, GPC stock is also trading at a discount compared to its peer O’Reilly ( ORLY ) trading at a forward P/E of 24.79x based on the FY23 consensus EPS estimate.
The company's growth prospects are well-supported by secular demand trends and its diversified business portfolio. Additionally, GPC's ongoing investments in driving cost efficiencies are expected to contribute to bottom-line growth. With promising growth prospects, an attractive dividend yield of 2.38%, and a lower-than-historical valuation resulting from recent stock price corrections, I maintain a buy rating on the stock.
For further details see:
Genuine Parts: A Good Buy At The Current Levels