Genuine Parts: Rising Demand For Replacement Parts Should Drive Growth (NYSE:GPC)

Investment Thesis

Genuine Parts Company (NYSE:GPC) deals in automotive and industrial replacement parts covering the major market of North America, Europe, Australia, and New Zealand. The company has recently delivered consecutive strong quarterly and annual results. I believe it can sustain this growth over a long period as a result of its expanding global footprint and solid demand trends.

About GPC

GPC deals in distributing automotive and industrial replacement parts globally. Through its offering of consumable/replacement parts and enhanced technology solutions, it operated in over 10600 locations in North America, Europe, Australia, and New Zealand in 2022. The company conducts its business in two segments: Automotive and Industrial. The automotive segment, considered the largest global automotive parts and care network, distributes automotive parts, accessories, and service items in North America, Europe, and Australasia. The company offers complete inventory management, cataloging, marketing, and training programs in each region. It covers all global motor vehicle models through its automotive network, including both commercial do-it-for-me (DIFM) and retail do-it-yourself (DIY). Its European operations are based in nine European countries where Alliance Automotive Group (AAG), one of the company’s wholly owned subsidiaries, distributes vehicle parts, tools, and workshop equipment, whereas North American distribution centers and automotive parts store sells automotive parts under the National Automotive Parts Association (NAPA) brand. The Industrial segment serves North America and Australasia through its wholly-owned subsidiaries Motion Asia Pacific and Motion Industries. This segment distributes industrial replacement parts and related supplies to maintenance across the United States, Canada, Mexico, and Australasia, including bearings, mechanical and electrical power transmission equipment, industrial automation and robotics, hoses, hydraulic and pneumatic components, industrial and safety supplies and material handling supplies. The company earns 62% of its total sales from the Automotive segment, while the industrial segment contributes 38% of the total revenue. GPC’s maximum business heavily depends on the USA as 68% of revenue is generated from the USA region. The company earns 14% of its revenue from the Europe region, while Canada & Australasia each contribute 9% to the total sales.

Financials

The increasing rate of longer and extended product life cycles has significantly boosted the demand for replacement parts and maintenance servicing worldwide. This rise in demand has created ample opportunities for the participants in the industry and has acted as a primary reason to accelerate the industry growth, which has been reflected in the company’s strong quarterly performance. Recently, Genuine Parts Company reported its Q4 FY22 results. The company has reported net sales of $5.5 billion, a 15.0% YoY growth compared to $4.8 billion in Q4 FY21. The Automotive segment reported a profit of $295 million, an 11.0% jump from $265.8 billion in last year’s same period, whereas the Industrial segment reported a profit of $230 million, which 49.8% YoY profit growth compared to $153.8 million in Q4FY21. The company reported a net income of $252 million which is a decrease of 1.56% compared to $256 million in Q4FY21. The decrease in net income resulted from loss related to investments in S.P. Richards and loss related to the integration of KDG. Decreased net income resulted in diluted EPS of $1.77. The company has also delivered an outstanding annual result for FY2022 by recording sales of $22.1 billion, which is 17.1% up compared to 18.9 billion in the previous year. The company reported diluted EPS of $8.31, which is a growth of 33.38% YoY compared to $6.23 in FY2021. $1.5 billion in cash flow from operations were generated by the company in 2022, which is an increase of 16.6% from $1.3 billion in 2021. In total, the company had $2.2 billion in liquidity at the end of the quarter and year.

The results have outperformed the market expectations in terms of sales. I believe that the company can sustain this growth over the long run due to the geographic diversity of its markets, advanced pricing strategies, and expansion strategies which have increased its global footprint. The company has provided guidance for FY2023. It expects revenue growth of 4% to 6% and diluted EPS between $8.80 to $8.95. I think the company’s expectations are conservative. According to seeking alpha, the company’s EPS might be between $8.85 to $9.17. I think the seeking alpha’s EPS estimates are accurate as GPC can benefit greatly from the solid demand trends in the industry.

Dividend Yield

The company has an impressive dividend history and has managed to increase the annual dividend for 67 consecutive years. In the previous year, it distributed a cash dividend of $0.895 in each of the four quarters, which makes the annual dividend $3.58, representing a dividend yield of 2.08%. Recently, in the current year, it has announced a dividend of $0.95 for the first quarter. I believe it can sustain this dividend for the next three quarters, making the annual dividend $3.8 per share, representing a dividend yield of 2.21%. This stable dividend payment history makes the company an attractive investment opportunity for risk-averse and yield-hungry investors.

What is the Main Risk Faced by GPC?

The company operates in a highly competitive industry where the competitors compete based on factors such as name recognition, product quality, customer service, store location, and pricing. It has to compete with national, international, regional, and local competitors, which include mass merchandisers, automobile dealers that offer manufacturer parts and accessories, automotive parts and accessories stores, and full-service automotive repair shops. To remain competitive in the market, the competitors may offer competitive prices, forcing the company to reduce its price or increase promotional spending. If it reduces the prices, it could negatively impact revenues and may contract the company’s profit margins.

Conclusion

Genuine Parts Company mainly focuses on selling industrial and automotive replacement parts on a global level. It operates in a highly competitive industry that can contract profit margins due to competitive pricing and promotional spending. The company has recently announced its fourth quarter and annual results for 2022, in which it has managed to perform well in terms of sales and provide positive guidance for FY2023. I believe it can deliver strong results in the coming quarters by outperforming the company’s expectations, mainly due to strong demand trends and the global geographic footprint of the company. It has experienced significant dividend growth over the years, which makes it an attractive investment opportunity for risk-averse and yield-hungry investors. After considering all the above factors, I assign a buy rating to GPC stock.