Does Genuine Parts Company (GPC) Have Any Genuine Upside Left?

Margins will continue to be under pressure

Genuine Parts’ revenues are projected to rise comfortably from $13.01 billion in FY 2012 to $15.12 billion in FY 2014, at an annual growth rate of 7.8%, aided by acquisitions and an overall healthy market projected for automotive replacement parts. This is due to the expected uptick in new vehicle sales that generally bolsters the demand for used-car parts as new care purchasers trade in their used cars, and also because the average age of vehicles on the road in the U.S. has risen to eleven years.

However, margins in the automotive division are expected to continue to remain under pressure where it has shown limited ability to raise retail prices for its products. Also, its industrial replacement parts is a low-margin business, limiting its ability to raise prices and margins there. As a result, earnings are expected to rise just in tandem with sales, at an 8.8% annual growth rate to $4.90 by FY 2014.

Top funds are selling

Genuine Parts was brought to our attention last month when our analysis of the collective buying and selling activity by 79 of our hand-picked legendary or guru fund managers, as can be seen on GuruFundPicks.com, ranked its stock at the bottom, at a GuruRank of 1.0 on a 1-to-5 scale. Taken together, these top fund managers sold 0.80 million shares in the latest available March quarter, a sharp 20% reduction from their 3.94 million share position in the company at the end of the prior December quarter.

Conclusion

We believe that Genuine Parts’ shares are a bit ahead of themselves. The upside is limited by its premium valuation, margin pressures, and low earnings growth, compared to its peers. However, we would not be sellers either, due to the positive industry trends for the automotive replacement parts business. We would instead investigate more into buying one of its undervalued, high-growth peers, such as AutoZone, Inc. (NYSE:AZO), and be ready to sell or short Genuine Parts’ shares when the automotive industry conditions reverse for the worse.

The article Does Genuine Parts Have Any Genuine Upside Left? originally appeared on Fool.com and is written by Manish Babla.

Manish Babla has no position in any stocks mentioned. GuruFundPicks.com offers a stock picking system based on consensus buys & sells by 300 of Wall St.’s top fund managers, including free access to latest filings. The Motley Fool recommends LKQ. The Motley Fool owns shares of O’Reilly Automotive. Manish is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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