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.

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