Genuine Parts Co.’s analysis versus peers uses the following peer-set: Toyota Tsusho (South Seas) Limited (TYO:8015), LKQ Corporation (NASDAQ:LKQ), China Zhengtong Auto Services Hldg Ltd (HKG:1728), Dorman Products Inc. (NASDAQ:DORM), Standard Motor Products, Inc. (NYSE:SMP) and SPK CORPORATION (TYO:7466). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.
| Quarterly (USD million) | 2012-09-30 | 2012-06-30 | 2012-03-31 | 2011-12-31 | 2011-09-30 |
|---|---|---|---|---|---|
| Revenues | 3,375.8 | 3,337.8 | 3,181.3 | 3,014.1 | 3,285.6 |
| Revenue Growth % | 1.1 | 4.9 | 5.5 | (8.3) | 3.2 |
| Net Income | 172.9 | 168.6 | 146.3 | 135.0 | 151.8 |
| Net Income Growth % | 2.6 | 15.3 | 8.4 | (11.1) | 0.0 |
| Net Margin % | 5.1 | 5.1 | 4.6 | 4.5 | 4.6 |
| ROE % (Annualized) | 23.1 | 23.2 | 20.6 | 19.1 | 20.9 |
| ROA % (Annualized) | 11.0 | 11.0 | 9.5 | 9.0 | 10.6 |
Valuation Drivers
Genuine Parts Co. currently trades at a higher Price/Book ratio (3.1) than its peer median (1.9). GPC-US’s operating performance is higher than the median of its chosen peers (ROE of 21.0% compared to the peer median ROE of 14.9%) but the market does not seem to expect higher growth relative to peers (PE of 15.4 compared to peer median of 14.3) but simply to maintain its relatively high rates of return.
The company’s median net profit margins of 4.8% and relative asset efficiency (asset turns of 2.1x compared to peer median of 1.7x) give it some operating leverage. GPC-US’s net margin is its highest relative to the last five years and compares to a low of 4.0% in 2009.
Economic Moat
Changes in the company’s annual top line and earnings (11.2% and 18.8% respectively) generally lag its peers. This implies a lack of strategic focus and/or inability to execute. We view such companies as laggards relative to peers.
GPC-US’s current return on assets is around peer median (10.2% vs. peer median 8.6%). This contrasts with its higher than peer median return on assets over the past five years (9.2% vs. peer median 4.6%), suggesting that the company’s relative operating performance has declined.
The company’s gross margin of 29.1% is around peer median suggesting that GPC-US’s operations do not benefit from any differentiating pricing advantage. In addition, GPC-US’s pre-tax margin of 7.6% is also around the peer median suggesting no operating cost advantage relative to peers.
Growth & Investment Strategy
GPC-US’s revenues have grown at about the same rate as its peers (4.2% vs. 4.2% respectively for the past three years). Similarly, the stock price implies median long-term growth as its PE ratio is around the peer median of 15.4. The historical performance and long-term growth expectations for the company are largely in sync.
GPC-US’s annualized rate of change in capital of 5.0% over the past three years is less than its peer median of 7.4%. This investment has generated a better than peer median return on capital of 15.1% averaged over the same three years. This combination of a relatively low investment with good returns suggests that the company is likely milking its business.
Earnings Quality
GPC-US’s net income margin for the last twelve months is around the peer median (4.8% vs. peer median of 4.8%). This average margin and relatively conservative accrual policy (2.1% vs. peer median of -1.0%) suggests possible understatement of its reported net income.
GPC-US’s accruals over the last twelve months are around zero. However, this modestly positive level is also greater than the peer median which suggests some amount of building of reserves.
Trend Charts
Company Profile
Disclaimer
This article was originally written by abha.dawesar, and posted on CapitalCube.