2023-06-23 04:31:24 ET
Summary
- Genuine Parts Company is a competitive global service organization distributing automotive and industrial replacement parts, with strong growth levers such as global presence, brand strength, and strategic acquisitions.
- GPC's financial performance in Q1 2023 was healthy, with sales increasing by 8.9% and a net income of $304 million, positioning the company well to take advantage of growth opportunities across the business.
- Despite some risks, such as macroeconomic uncertainties and high financial leverage, GPC's solid fundamentals and financial performance warrant its valuation, making it a recommended buy for investors seeking diversification.
Investment Thesis
Genuine Parts Company ( GPC ) is a global service organization that distributes automotive and industrial replacement parts. It operates through the Automotive Parts Group and Industrial Parts Group segments. As shown below, the company is the most competitive among its industry peers. GPC's satisfactory performance explains its upward trajectory.
The company's competitive advantages fueled its outstanding performance, which leveraged its growth. The growth levers include global presence, strong brand strength, strategic acquisitions, and global trends from which the company will benefit.
Additionally, the company's net income and cash flow have increased in 2022 compared to the previous year. Further, the EPS growth of $1.07 in 2022 YOY and an expected earnings growth of nearly 7% annually are a vote of confidence for investors to grow their money. GPC's healthy financial position is a crowning stroke for its compelling growth opportunities. I'm bullish on the stock and rate it a buy.
Segment analysis
Automotive parts
The Automotive segment is the largest business segment of GPC. It distributes automotive replacement parts and accessories in New Zealand, North America, and Australia. In North America, parts are solemnly sold primarily under the NAPA brand name.
Looking at the Q1 2023 performance, the sales were $3.5 billion, an increase of approximately 7% versus the same period in 2022. The total sales benefited from the global diversification as businesses outside the US posted high single-digit to double-digit growth in local currency during the first quarter.
The profit in the first quarter was $264 million, essentially flat with last year, and the segment operating margin was 7.5% compared to 8.1% in 2022. Focusing on the segment's performance by geography, US sales grew approximately 4% during the quarter, with comparable sales growth of roughly 3%. The strong performance of the European, Canadian, and Asia-Pacific businesses helped partially offset lower margins in US Automotive business.
GPC website
Industrial parts
This segment operates under the name Motion Industries . It offers access to industrial replacement parts and related supplies and serves MRO and OEM customers throughout North America. The sales amounted to $2.3 billion, an increase of 11.9% compared to Q12022. Comparable sales growth increased by approximately 12.1% in the first quarter versus last year, marking Motion's eighth consecutive quarter of double-digit relative sales growth.
In addition, Motion continues to see solid performance with its corporate account initiatives, as sales with these customers grew approximately 20% in the first quarter. New customers and strategic renewals of existing relationships drive corporate account strength.
Industrial segment profit in the first quarter was approximately $262 million, or 11.6% of sales, representing a 230 basis point increase from last year. The continued profit improvement for this segment reflects excellent operating discipline and solid sales growth, both in North America and Asia-Pacific, as shown below.
GPC website
Additionally, North America continues to build on the synergies from last year's KDG acquisition. Motion realized over $30 million in synergies in the first year, and expects to achieve a target of over $50 million in total synergies by the end of this year, one year earlier than the initial expectation.
Growth Levers
GPC's future performance and sustainability depend on its growth strategies as it aims to be the leading global automotive and industrial parts distributor and solutions provider. The company is riding on these competitive advantages over its competitors to maintain its lead in the market.
1. Global Presence and Brand Strength
The company serves approximately 10,000 locations in 17 countries, as illustrated below. The vast global presence creates a wide range of customers they serve, thus serving the expansion strategy. On the other hand, It is a risk mitigation measure against the total failure of a business borne of the same geographical uncertainties.
The company is further working with the best brands under which its products are sold. In North America, the automotive product trade is under the NAPA brand , one of North America's leading brands in automotive parts. Synonymous with trust and professionalism. The company is striving to grow NAPA-branded sales from €300 million in 2022 to approximately €400 million in 2023. Similarly, the Asia Pacific region primarily serves the Australasian markets under Repco , Australia's most significant auto parts and car accessories retailer.
2. Mega global trends
The growing concerns about environmental pollution by vehicles have fueled the demand for environmentally friendly electric cars. Global electric vehicle demand will grow at a CAGR of nearly 21% by 2030 . Since GPC serves the EV sector, the company expects to enjoy the benefits arising from this global trend. Thus, strategically positioning GPC as a sustainable company.
Secondly, complexity in car functionality is on the rise. Customers prefer vehicles with modest designs, features, and functionality. The trend thus fuels the demand for more DIFM (Do-it-for-me) customer segments.
Financials
In the first quarter of 2023, GPC's financial performance was healthy. Sales increased to $5.8 billion, up by 8.9%. The trend is attributed to the strong growth in market share gains across Europe and the entry of Spain and Portugal in 2022 . The EBITDA amounting to $508 million represented an 11% increase in year-over-year growth. In Q1 2023, net income was $304 million, or $2.14 per diluted share. The adjusted net income of $266 million, or $1.86 per diluted share in 2022, is an increase of 15%.
Free cash flow was $109 million, and closed the first quarter with $2.1 billion in available liquidity. The debt to adjusted EBITDA was 1.7 times, compared to a targeted range of two to 2.5 times. The company is well-positioned with financial strength and flexibility to take advantage of growth opportunities across the business.
Moving onto the balance sheet analysis, its assets cover the company's liabilities well, with its total liabilities trailing at $12.97b and assets trailing at 16.91B, assets can cover this liabilities 1.3x which I believe is healthy. Its debt stands at $3.38 billion against equity of $3.94 billion, a debt-to-equity ratio of 85.9. GPC has a substantial market capitalization of $24.4 billion, so it could raise cash to ease its balance sheet if needed. Additionally, the company's debt relative to its earnings shows that net debt is only 1.3 times its EBITDA. And its EBIT quickly covers its interest expense 24.5 times. So use debt is reasonable. Another good sign is that the company has increased its EBIT by 28% in the past twelve months, making it easier to pay down debt.
Risks
- Uncertainty and deterioration in general macroeconomic conditions domestically and globally, including inflation, employment rates, wages, changes in energy costs, or other economic conditions, could hurt the business, financial situation, results of operations, and cash flows.
- The commercial and retail customers may experience a deterioration in their financial resources, which could result in existing or potential customers delaying or canceling plans to purchase products.
- High financial leverage. The level of indebtedness could, among other things:
- cause distress in satisfying all financial obligations with ease, including paying dividends.
- increase vulnerability to adverse economic and industry conditions;
- constrain financial flexibility to adjust to changes and opportunities arising in the industry, which may place GPC at a competitive disadvantage.
Valuation
Although the relative valuation metrics suggest that GPC is trading at a premium as exhibited by its PE and PS ratios of 18.49 and 1.01 respectively being above the industry medians of 16.71x and 0.86 respectively. I believe the company's solid fundamentals and particularly its financial performance, warrants its valuation. Further, looking at forward growth projections , the company is expected to outpace the industry medians in nearly all financial fronts leading to an optimistic value projection in the future. Further, a DCF model by finbox shows that the company is even trading below its fair value. According to the model, the company has a fair value of $176.86 with an upside potential of about 10%. In my view, looking at forward projections, this company can exploit this potential, and therefore, investors can leverage this opportunity because, in my view, waiting for the stock to dip may not happen soon, given its solid fundamentals.
Conclusion
Backed by its solid financial position, the company will benefit from trends such as the ongoing increase in miles driven, an aging and complex vehicle fleet, rising interest rates, and continued high prices for new and used vehicles. These are all critical drivers for ongoing growth in demand, especially for the DIFM segment, which represents 80% of global automotive sales. Given this background and the current valuation, I recommend this stock to potential investors seeking to diversify here.
For further details see:
Genuine Parts: Solid Growth Lever At A Reasonable Price