Genuine Parts: Buy, Sell, or Hold?
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Transcript of Genuine Parts: Buy, Sell, or Hold?
Genuine Parts Company:Buy, Sell, or Hold?
The business
• Genuine Parts (NYSE: GPC) operates in 4 key business lines:• Automotive Parts (NAPA Auto Parts)• Industrial Parts (Motion Industries)• Office Products (S.P. Richards)• Electrical/Electronic Materials (EIS)
Source: www.genpt.com
It’s genuinely a parts company
Source: Company 10-K for FY 2013, via edgar.sec.gov.
• Auto parts represent just over half the company’s revenues.• Industrial parts generate about a third of its sales.
• “Parts” are less economically sensitive than total autos.• Average age of a car on the road: 11.4 years• Older cars typically need more parts/maintenance than
new ones.
• Compared to other auto parts companies, Genuine Parts shines on several key financial metrics:
• The highest total revenue• The strongest dividend yield• The only one with any sort of dividend growth trend• The least debt-levered balance sheet
Why consider Genuine Parts over its peers?
But is it worth owning?• Genuine Parts operates in a fairly stable industry.
• It looks reasonable on key measures compared to its peers.
• Still, for an outside investor, it’s only worth owning if it looks capable of potentially providing decent risk-adjusted returns.
You will never know for certain, but looking at the company’s:• Balance sheet • Dividend practice, payout ratio, and coverage levels• Valuation
...will usually help you get a sense for the company’s potential.
Key Financial Factor Review -- Balance Sheet
• Genuine Parts’ balance sheet looks reasonable -- and solid enough to help it navigate economic fluctuations.• Debt/equity ratio around 0.2• $150 million in cash on its balance sheet• 1.6 current ratio
Genuine Parts could be here, based on its balance sheet.
Key Financial Factor Review -- Dividend
• Genuine Parts has a strong and well-supported dividend• Payout ratio of 49%• Current yield of 2.3%• 58 years of dividend growth, with a 7% increase in 2014
Reasonable current yield, a solid payout ratio with room to keep growing as the company does, and a long history of directly rewarding shareholders for the risks they take.
Genuine Parts could be here, based on its dividend.
Key Financial Factor Review -- Valuation• Market cap of $13.1 billion on July 26, 2014
• Fair-value estimate around $11.6 billion
• Sales growth slowed in the most recent quarter.
• All fair-value estimates rely on assumptions for the future and may not reflect what the company will actually deliver.
• Genuine Parts’ market cap is close enough to that fair-value estimate that there’s no compelling need to sell based on valuation.
Genuine Parts could be here, based on valuation.
Net conclusion: Hold and monitor
Genuine Parts’ composite result
• Genuine Parts continues to operate effectively, grow reasonably and reward its shareholders decently.
• It hasn’t overleveraged its balance sheet or committed to unsustainable dividends.
• Its valuation looks reasonable enough to continue holding, but not cheap enough to make it a compelling buy.