Here at the Lab, we love Genuine Parts (NYSE:GPC), and today, we are back to comment on the latest company development. Given the minus 22.5% on a year-to-date stock price performance, we believe there are at least five reasons to re-enter. Still, to support our investment thesis, we should recall our MACRO to MICRO supportive buy: 1) increased car complexity, 2) aging car population development, 3) effective capital allocation with dividend aristocrat status, and 4) fewer new cars sold with higher maintenance repair.
Looking back to our publication called “Long Only,” Genuine Parts is still benefitting from the aging car across its geographical regions. In particular, the North American average car age passed from 12.1 to 12.5 years old, while the EU average car age passed from 11.8 to 12 years old.
Why are we still supportive?
Here at the Lab, we believe that Genuine Parts will deliver long-term returns for the following four reasons:
- (Solid results – Fig 1) Q3 results were a beat at the EPS level, thanks to higher margins. In detail, GPC reported $2.49 versus consensus estimates of $2.39. The Wall Street beat was supported by a higher operating margin in the company’s Industrial segment. The division is fully benefitting from the successful KDG acquisition. While top-line sales growth in both industrial and automotive decelerated sequentially, GPC’s bottom line was supported by solid margins and resulted in EBIT beating consensus. Looking at the Automotive comps, we should recall a deceleration in the US market (from a plus 1% in Q2 to a minus 3% in Q3). This creates an attractive opportunity to re-enter the equity story (GPC stock price is still down from Q3 reporting day);
- (Genuine Parts comps are more expensive). Here at the Lab, looking to the GPC peers, we report that the company trades at a 2024 P/E below 14x, which we believe is overly punitive given its diversified business mix and track record. Autopart peers, such as O’Reilly Automotive, trades at a P/E of more than 20x, while AutoZone Inc. trades at a 2024 P/E of about 17x (again, a premium compared to GPC). The only comp that is trading below GPC is Advance Auto Parts; however, the company recently changed its management team, and we see more downside than upside;
- (Right capital allocation priorities – Fig 2) The company has a long history of raising its DPS yearly. This marked 67 years, and now it yields 2.83%. The company’s dividend and buyback activity combined comprised 50% of GPC’s capital deployment over the last years. Despite that, the company is a leading industry consolidator with a proven record of accretive acquisitions. Despite that, the company has maintained very conservative leverage with only 1.56x total debt to EBITDA on a TTM basis;
- (Higher guidance – Fig 3) The earnings growth story remained intact, and the company reaffirmed its sales outlook, narrowing to the upwards of its EPS bottom guidance. In numbers, the updated diluted EPS moved from $9.15 to $9.30 to $9.20 to $9.30. We believe the stock has been overly punished on lower sales trends, mainly due to poor management communication. Having said that, there is a margin expansion story to price in, and GPC is worth watching.
Fig 1
Fig 2
Fig 3
Updating our numbers, we derive a 4.5% revenue growth in 2023, at $23.08 billion in sales. In our 2024 forecast, top-line sales are at 3.3% to $23.8 billion. On a management 2023 outlook, we forecast an adjusted EBITDA of $2.15 billion with a margin of 9.3%. In 2024, the EBITDA margin will be set at 9.6% for a total value of $2.29 billion. Our adjusted EPS reached $9.32 and $10.14 in 2023 and 2024, respectively. On a twelve-month basis, our FCF yield is above 9% and fully supports the ongoing dividend yield. In our numbers, given GPC dividend aristocrats’ status, we forecast a DPS hike from $3.8 to $3.99 per share, confirming a 5% dividend growth (in line with margins growth).
Conclusion and valuation
A rare synchronized growth in both GPC divisions supports our overweight rating. Additionally, there has been a cultural change with new management looking to faster-growing end markets, with a supportive view on scaling IT infrastructure, leveraging the supply chain, and improving processes. Our P/E multiple is set at 16x (in line with GPC pre-COVID-19 multiple), and on a twelve-month basis, with our EPS at $10.14, we derive a price target of $162 per share (from $165 per share). As the US auto aftermarket will likely normalize and GPC international markets pick up with more earnings weight, we believe the company is more defensive vs. most US comps. Downside risks to our target price include a slowdown in miles drive in the EU and the USA, higher competition and online channel shift, failure in accretive M&A, and slower-than-expected economic recovery.