2023-03-07 05:49:19 ET
Summary
- GPC is benefiting from tech investments that allow it to better source and price its products.
- The company serves generally less economically sensitive end markets.
- GPC stock looks like it has good upside from here.
Genuine Parts ( GPC ) looks poised to benefit from pricing initiatives and potential M&A. Serving markets that are less economically sensitive than most, I think the stock has solid upside from here.
Company Profile
GPC distributes automotive and industrial replacement parts. The company operates in North America, Europe, and Australia and Asia, which it refers to as Australasia.
Approximately 77% of its sales come from North America, 14% Europe, and 9% Australasia.
In the auto market, the company sells parts through a combination of distribution centers, company-owned stores, and independently owned store. In North America, it operates under the NAPA (National Automotive Parts Association) brand. In Europe is operates under the NAPA brand as well as Groupauto, Precisium Group, Pièces Auto, UAN, Alliance Automotive Group Germany, PartsPoint, and Lausan. In Australasia, it operates under the NAPA brand as well as Repco.
The company offers over 725,000 different auto replacement parts for most vehicle make and models, as well as for motorcycles, EVs, RVs, buses, and even farm equipment.
On the industrial side, the company distributes its products through distribution centers, service centers, and branches. It serves over 200,000 maintenance, repair and operation ( MRO ) and original equipment manufacturer (OEM) customers throughout the U.S., Canada, Mexico, and Australasia in various industries from pharmaceuticals, to energy, to food and beverage. Motion control represent about 40% of sales in the segment.
Opportunities and Risks
GPC has done a good job of streamlining its business to focus on its two key markets - automotive and industrial – and investing in technology to improve efficiencies and drive growth. In the past couple of years, the company has really embraced more-modern, cloud-based tech stacks to help it in the areas of supply chain management, category management, and pricing.
Speaking at a Stephens Investment Conference, CFO Herbert Nappier said:
“Those investments come from the use of technology and the technology that we're leaning into is allowing us to drive the business forward, I think, is a big differentiator for us. Being smarter about how we manage the supply chain and being really smart about category management.
“In this environment right now, what we've seen is that availability is actually the thing that our customers are focused most on followed by quality service and then lastly, price. And so making sure you've got the right part at the right time in the right network is a big focus. Technology and our analytics tools have been able to help us do that not only on the supply chain, but the category management and then, of course, pricing.”
Pricing has been a big focus for GPC, and its investment into analytics is providing it data to make strategic price increases, as well as with where to best source parts. It’s able to do this at both a SKU and market level. On its Q4 earnings call, President & COO William Stengel said:
“We're seeing great pricing work happening on both sides of the business, and in particular, in U.S. automotive. I would say, they're one of the most dynamic teams in terms of the things that they're doing around pricing. We've been at this now for 12 to 18 months in a pretty robust way, both in terms of the technology that we're using, the data, working with a third party, et cetera. And we are actively thinking through the right way to execute pricing strategies relative to the market. That's really at the core of the work that we're doing.”
Digital transactions, both B2B and e-commerce, is another investment the company is focused on. Speaking at a Gabelli Conference, President & COO William Stengel said:
“For us, the way to think about it is the electronic interaction we have with customers, whether it's on the do-it-for-me or do-it-yourself, is totally relevant. It's about 20% of our interactions with customers.
So whether it's in integration into the customer, whether it's NAPA online, whether it's our B2B electronic interface, it's super critical to that customer experience. You have endless opportunities to make that easier. And when you do that, it drives growth and customer loyalty, share of wallet, transaction volume and transaction ticket size.
So it's a big part of what we're doing and investing in. And I think the industry and most of these industries will continue to invest in the digital experience.”
As I noted in a recent article on Veritiv ( VRTV ), the move into digital transactions has been a successful strategy for a number of companies in the distribution business, whether it be Builders FirstSource ( BLDR ) in homebuilding or The Chefs' Warehouse ( CHEF ) in food distribution. The move to digital transaction can make things be both easier for customers, as well as margin accretive.
GPC’s overall strategy appears to be working as evidenced by its strong sales growth and improving margins. The company’s automotive segment has seen its margins improve 140 basis points since Q4 2019, while its industrial segment has seen its segment margins improve by 240 basis points. Given the lower margin profile of distribution businesses, margin improvement tends to be a big driver.
M&A is another opportunity that GPC is looking to take advantage of, and another common growth driver you’ll see out of the distributor’s growth playbook. Acquisitions are a great way for distributors to expand their reach either geographically and/or in adjacent areas. Deals also tend to be highly synergistic, as companies can take out back-end cost and gain important scale. GPC bought industrial distributor Kaman Distribution Group $1.3 billion in 2022, but it will still be on the prowl for more accretive deals.
Turning to risks, the macro environment is on everyone’s mind. The automotive part of GPC’s business is pretty economically insensitive, and in fact can be a bit countercyclical. The reason for this is that when a car needs to be repaired, most people need to fix it. In addition, during periods of economic weakness, people tend to hold onto their cars longer, which leads to more repairs and parts that are needed.
GPC’s industrial business, meanwhile, is a little more sensitive to the macro environment. As such, the company is forecasting a stronger 1H 2023 in this segment, with the potential for slower growth in the back half. The company indicated that it just has less clarity in this business, but that it remains bullish on most of the end markets its serves.
Valuation
GPC trades at a 13.1x EV/EBITDA multiple based on the 2023 EBITDA consensus of $2.13 billion. Based off of the 2024 EBITDA consensus of $2.24 billion, it trades at around 12.5x.
It trades at 19.4x forward EPS, with analysts projecting 2023 EPS of $8.92.
It’s projected to grow revenue 5% in 2023, decelerating to 3% growth in 2024.
For its part, GPC forecast 2023 revenue to grow 4-6% and for EPS of between $8.80- $8.95.
The company generates about $1.5 billion in cash, and was 1.7x leveraged at year-end 2022.
Conclusion
I like the technological initiatives that GPC is pursing to improve its business. Pricing appears to be in the early stages, and this should really boost results as the company continues to optimize both its sourcing and the prices it charges. In general, I’ve come to really like the distribution business model, and technology improvements can really help drive these types of businesses given their lower margin profiles. Meanwhile, the markets GPC serves are a little less economically sensitive than most.
Overall, I think GPC is a really good company in an attractive industry. I think the stock has upside to $215, which would be about a 15x multiple on 2024 EBITDA.
For further details see:
Genuine Parts Benefiting From Tech Investments