Genuine Parts Company (NYSE:GPC) is a parts distributor for the automotive, industrial, office products, and electrical industries.
The company’s operations are not exactly flashy, but they have been successful for a very long time.
Genuine Parts Company was founded in 1928 and has paid increasing dividends for 59 consecutive years.
Source: Genuine Parts Company Investor Presentation, slide 44
The company’s long dividend history makes it one of just 17 companies in the exclusive Dividend Kings group – which is comprised of businesses with 50+ years of consecutive dividend increase.
However, despite the strong performance, Genuine Parts Company remains a stock that smart money are not very excited about. At the end of June, only 27 funds from our database held stakes in the company with an aggregate value of $479.46 million, equal to around 3.50% of the company at the end of June. Among them, Mario Gabelli’s GAMCO Investors held some 2.53 million shares, followed by Jim Simons’ Renaissance Technologies with 649,800 shares, up by 67% on the quarter.
Genuine Parts Company is most widely known for its NAPA Auto Parts business. Genuine Parts Company operates over 7,100 automotive parts stores in the United States, Canada, Mexico, Australia, and New Zealand.
The bulk of these (over 6,000) stores are in the United States. Genuine Parts Company owns around 1,100 of its stores in the United States; the rest are franchised.
In fiscal 2014 automotive sales accounted for more than 50% of Genuine Parts Company’s total sales. In addition to its large automotive segment, the company also has 3 smaller segments: Industrial, Office Products, and Electrical.
Source: Genuine Parts Company 2014 Annual Report
The percentage of total operating income each segment has generated through the first 9 months of fiscal 2015 is shown below to give additional insight into the relative profitability of each segment:
- Automotive: 57% of total operating income
- Industrial: 27% of total operating income
- Office Products: 11% of total operating income
- Electrical: 5% of total operating income
The Industrial segment sells industrial replacement parts to manufacturers and maintenance/repair businesses in North America under the Motion Industries name.
The Office Products segment wholesales office products to over 4,300 resellers through its network of 41 distribution centers in the United States and Canada under the SP Richards name.
The Electrical segment distributes electronic parts and products throughout North America under the EIS name.
Competitive Advantage
Genuine Parts Company’s competitive advantage comes from its extensive distribution network, combined with its trusted brand names.
The company has built an extensive supply chain network through North America over the last 87 years. This distribution system gives the company the ability to quickly supply retailers and small stores with the parts and supplies they need. To compete with Genuine Parts Company, a competitor would have to outlay a substantial amount of capital to build the infrastructure that Genuine Parts Company has built over the last 87 years.
One does not have to drive far to find a NAPA auto parts in most areas of the United States. The company has over 6,000 locations in the United States. The sheer number of NAPA auto parts locations gives the company an edge over smaller auto repair stores.
The company’s franchise business model has allowed it to rapidly expand its territory across the United States. The NAPA brand lets customers know they are going to an established business, not a fly-by-night operation for their auto repairs. The combination of convenience and trust has helped NAPA maintain its growth, earnings, and dividends.
Growth Prospects
Genuine Parts Company (NYSE:GPC) has compounded its earnings-per-share at a respectable 7% a year over the last decade. The company’s dividend payments have grown at 6.8% a year over the same time period.
Earnings-per-share growth has come primarily from increasing sales and share repurchases over the last decade. The company’s net profit margin has been relatively flat over the same time period.
The company is projecting earnings-per-share growth of 7% to 10% a year going forward. I doubt Genuine Parts Company manages to grow earnings-per-share at 10% a year over the long run. A growth rate of 6% to 9% a year is more likely given the company’s history.
This growth combined with the company’s current dividend yield of 2.9% gives investors an expected total return of ~9% to ~12% a year. Not bad for a ‘boring’ business.
Genuine Parts Company took a new step in the company’s growth in 2013 when it acquired Exego. Exego is the leader in automotive parts and accessories in Australia and New Zealand. Genuine Parts Company is investing heavily in the region to build out stores and slowly consolidate the fragmented automotive parts market in Australia and New Zealand. Genuine Parts Company recently added to its investment in Australia by purchasing Covs Parts. Covs Parts has a 25 branch distribution network in Australia.
In North America, Genuine Parts Company will grow by incrementally expanding its various distribution networks as well as through potential small bolt-on acquisitions.
Recession Performance
Genuine Parts Company held up fairly well through the Great Recession. The company remained profitable, though earnings did dip somewhat.
The company’s earnings-per-share through the Great Recession and subsequent recovery are below:
- 2007 earnings-per-share of $2.98 (new high)
- 2008 earnings-per-share of $2.92 (2.0% off high)
- 2009 earnings-per-share of $2.50 (16.1% off high)
- 2010 earnings-per-share of $3.00 (new high)
The automotive repair industry is consistent. People simply must fix their cars regardless of the overall economy.
Valuation & Final Thoughts
Genuine Parts Company (NYSE:GPC) has historically traded for a P/E ratio of between 14 and 17 over most of the last 15 years.
A P/E ratio in the range of 16 to 18 is likely fair value for Genuine Parts Company given today’s low interest rate environment and the company’s solid total return potential and earnings stability.
Genuine Parts Company is currently trading for a price-to-earnings ratio of 18 using adjusted earnings-per-share. The company is likely trading around fair value at current prices.
Genuine Parts Company is a high quality business that has a long history of growth and dividend increases. Genuine Parts Company ranks above average using The 8 Rules of Dividend Investing.
The company garners an above-average rank due to its above-average yield, and stability combined with a fair valuation and solid growth prospects.
Disclosure: None
