Genuine Parts Company (GPC): Why Is This Auto Parts Company the Best For Your Portfolio?

Genuine Parts Company (NYSE:GPC) it the leading U.S. wholesale distributor of automotive replacement parts, and its better known by the name of its distribution centers and stores, NAPA. With steadily rising revenues over the past several years, as well as a strong balance sheet, healthy dividend yield, and aging vehicle population in the U.S., Genuine Parts looks like a winner at first glance. Let’s take a closer look at the company, and then take a glance at who they compete with to see which would make the best addition to our portfolio.

About the company

Genuine Parts Company (NYSE:GPC) operates throughout North America, and recently added Australia to its global footprint with the recently acquired Exego Group. The company operates through four different segments, two of which are to be expected and the other two a bit surprising.

Not surprisingly, the automotive parts segment is the company’s largest, accounting for about half of the total sales. This segment includes the network of over 6,000 NAPA auto parts stores, about 1,100 of which are company-owned. Closely related is the company’s industrial parts segment, which accounts for 34% of Genuine Parts Company (NYSE:GPC)’ sales and distributes a broad line of replacement parts for various industrial vehicles and machinery, such as heavy farm equipment.

One of the company’s not very well-known segments is their office products group, which makes up 13% of the company’s sales and operates under the S.P. Richards brand name. The S.P. Richards Company is over 160 years old and is one of the largest business and office products wholesalers with a network of 40 distribution centers that carry their own brand, as well as the leading name brand office products. The office supply segment produced about $1.7 billion in revenue last year, and in my opinion adds some very valuable diversification to Genuine Parts Company (NYSE:GPC)’ business. The company also has a small electrical material segment, which wholesales supplies for the electrical industry and makes up the remaining 4% of the company’s revenue.

The numbers

At 18.4 times TTM earnings, Genuine Parts Company (NYSE:GPC) may seem a little pricy for such an established and stable company, but there is a good reason. Growth is expected in all four of the company’s segments, as Genuine Parts stands to benefit from the U.S. economic recovery more than most. The total number of vehicles in the U.S. is on an uptrend, as is the average age of those vehicles and hence the need for replacement parts. As far as the office supply business goes, a lot of companies were on severe spending restrictions as a result of the recession, and as the economy improves, office supply budgets will grow accordingly.

Genuine Parts Company (NYSE:GPC) is expected to earn $4.51 per share this year, rising to $4.90 in 2014. This translates to a forward earnings growth rate of around 9%, which I believe justifies the valuation when combined with the company’s strong fundamentals. Genuine Parts has a very healthy balance sheet, which actually has more cash on hand than debt, a great indicator of financial health. The company also pays a very nice dividend yield of about 2.8%, which has been raised every year, including during the peak recession years.

A glance at the major competition: AutoZone, Inc. (NYSE:AZO) and Advance Auto Parts, Inc. (NYSE:AAP)

AutoZone operates more than 5,000 stores in the U.S. and Mexico. While AutoZone, unlike Genuine Parts Company (NYSE:GPC), is strictly an automotive retail play, they have grown their sales very impressively over the years. AutoZone, Inc. (NYSE:AZO) appears to be a bit “cheaper” at 17.5 times TTM earnings with 12% forward growth expected, there are a few negatives to be aware of. First, AutoZone pays no dividend whatsoever, which is sure to be a turn-off to income-seekers. Also, the company is not quite as financially impressive, with over $3.7 billion more debt than cash.