2023-10-20 08:15:00 ET
Summary
- Genuine Parts Company's shares dropped 12.5% on weak sales, but after exceeding earnings forecasts for Q3 2023.
- GPC's performance was encouraging, with strong revenue growth in the Automotive segment offsetting weaker results in the Industrial segment.
- Management reaffirmed their guidance for the year, expecting revenue growth of 4-6% and increased earnings per share.
Mr. Market can be truly fickle from time to time. Even when things go right, the market can smack you down. One good example of this can be seen by looking at Genuine Parts Company (GPC), a company that engages in the automotive parts distribution business and that also produces industrial parts while simultaneously providing various equipment and machine-related services. Shares of the company plunged, dropping around 12.5% after news broke that the company exceeded analysts' expectations for the third quarter of 2023 when it came to earnings and but fell short of expectations on the top line. Guidance remains robust and yet the market seems unhappy.
Although this phenomenon may seem peculiar, it's not terribly surprising to see. This is especially true when we are dealing with uncertain economic times and a company that has been more or less fairly valued. During tough times, it's the cheaper companies that tend to perform best while firms that perform perfectly well from a fundamental perspective can still be hit by the volatility of the stock market. I, for one, I am not terribly surprised by this development. Just over a year ago, on October 9th of 2022, I ended up downgrading the company from a 'buy' to a 'hold' because shares had experienced some rather meaningful upside leading up to that point. I acknowledged that the company was a quality operator, with strong fundamental performance. But at that point, it had become fairly valued. Fast forward to today, and the picture is once again starting to look interesting. But I'm not yet ready to change my rating to something more bullish.
Genuine Parts' performance is encouraging
Before the market opened on October 19th, the management team at Genuine Parts Company announced financial results covering the third quarter of the company's 2023 fiscal year. Revenue rose year-over-year, totaling $5.82 billion. That represents an increase of 2.6% over the $5.68 billion generated one year earlier. But it's $90 million lower than what analysts had forecasted. The greatest chunk of this sales increase came from the Automotive segment, with revenue popping 3.9%. Most of this gain, about 2.4%, came from acquisitions that the company had made. Another 0.9% can be chalked up to foreign currency fluctuations. That left comparable sales climbing a modest 0.6%. The picture would have been even better had it not been for the fact that the company had one extra sales day in the third quarter of last year than the same time this year. Strategic sales initiatives across Europe, Asia, and Australia, helped the company more than offset weakness in the automotive business here at home.
By comparison, the Industrial segment managed to fall quite short. Revenue grew by only 0.6% year over year. A 0.3% rise in comparable sales, combined with a 0.6% benefit caused by acquisitions more than offset the 0.3% pain caused by foreign currency fluctuations. Management did say that results reflected anticipated softer economic activity and weaker industry demand. Frankly, this is something to take into consideration. The Federal Reserve continues to pursue a high-interest rate policy aimed at combating inflation. And at some point, that is bound to impact demand for an enterprise like this.
On the bottom line, the picture was quite positive. Earnings per share came in at $2.49. That's up nicely compared to the $2.20 reported at the same time last year. It also exceeded analysts' forecasts by $0.05. This translated to net profits of $351.2 million. That represents an increase of 12.4% over the $312.4 million reported one year earlier. In addition to the rise in sales helping the company, it also benefited from an improvement in the company's gross profit margin from 34.9% to 36.2%. Management chalked the gross margin improvement up to strategic pricing and sourcing initiatives that boosted the company's profitability. This improvement translated to strength elsewhere. Operating cash flow, for instance, expanded from $453.6 million last year to $625.4 million this year. If we adjust for changes in working capital, we get a rise from $408 million to $445.1 million. And finally, EBITDA for the enterprise increased from $526.2 million to $564.7 million. The results experienced during the third quarter were helpful in pushing up results for the first nine months of the year as shown in the chart above.
Given this strength on both the top and bottom lines, it should come as no surprise to investors that management has mostly reaffirmed guidance for the year. Just like when they reported results during the second quarter, the management team at Genuine Parts Company still believes that revenue should grow by between 4% and 6% this year. Earnings per share guidance, however, has increased, with the company now expected to report profits of between $9.20 and $9.30. Prior guidance called for the lower end of that range to be $9.15. Meanwhile, operating cash flow is still expected to be between $1.3 billion and $1.4 billion.
If management can come through on this guidance, then net income at the midpoint would total $1.30 billion. That's quite a bit higher than the $1.18 billion that was generated in 2022. Operating cash flow, however, is expected to be a bit lower. No guidance was given when it came to EBITDA. But if we assume that it will decrease at the same rate that operating cash flow is expected to, then we should anticipate a reading this year of $1.82 billion. Using these figures, I was able to value the company as shown in the chart above. As you can see, the stock does look cheaper on a forward basis when using the price-to-earnings approach. But when it comes to the other two profitability metrics, it is a bit more expensive. In the table below, I then compared the company with five firms that have similarities to it. In each of the cases, two of the five firms were cheaper than it.
Company | Price/Earnings | Price/Operating Cash Flow | EV/EBITDA |
Genuine Parts Company | 14.0 | 13.5 | 11.5 |
AutoZone (AZO) | 18.8 | 16.1 | 12.2 |
LKQ Corp (LKQ) | 13.1 | 10.8 | 8.8 |
Advance Auto Parts (AAP) | 8.8 | 12.3 | 5.8 |
O'Reilly Automotive (ORLY) | 24.9 | 16.5 | 17.6 |
W.W. Grainger (GWW) | 20.2 | 21.6 | 13.8 |
Takeaway
From all that I can tell, Genuine Parts Company had a pretty solid quarter. Management did mention industrial growth slowing at this time, which may have spooked the markets to some extent. But outside of that, the picture as a whole looks very positive. Shares are getting cheaper and, if we weren't facing such significant economic uncertainty, they would be cheap enough for me to upgrade the stock to a 'buy'. But because of that uncertainty, I have become more cautious as well. As a result, I am planning to keep the company rated a 'hold' for now. But if shares fall another 10% or so, without a corresponding decrease in guidance, then I likely will upgrade it to a 'buy'.
For further details see:
Genuine Parts Stock Plunges Despite A Solid Q3 Showing