I am not sure whether your no growth calculation assumes zero growth or 6% per year decline in business. This is because my no growth scenario results in 6% per year growth.
My scenario assumes that management is rationale and pursues the best interests of the shareholders. If GPC has no growth then it will earn 2.25 this year and next year. Management should then invest the 1.15 excess of earnings over 1.10 dividend for the best return available. This return should be at least as good as buying in the stock. 1.15 times 750 million shares = 862.5 million dollars. This will purchase 45 million shares at 19 per share. The 1,687.5 million net income (750 million shares X 2.25) is now divided among 705 million shares for an EPS of 2.394. This is a growth in EPS of over 6%.
Therefore, my no growth scenario results in a total return of over 12% (5.8% dividend yield plus 6.4% dividend growth. Should the price of the stock rise faster than the 6.4% growth then so much the better.
If GPC were at 15 per share the dividend yield would 7.3% and GPC would be able to buy in 57.5 million shares next year. EPS would be 2.437 on the reduced 692.5 million shares. This is an 8.3% growth for a total return of 15.6%.
It appears to me that the 12% return on the 19 price is more than fair and justifies that price. The 15.6% return on the 15 price appears excessive and indicates substantial undervaluation assuming no growth.
I would agree with a return of 15% annual at ZERO growth at a purchase price of 15. This is not because I am bright enough to think this up myself but rather because that is what the Quicken tool suggests. Your number is only slightly higher even though you and Quicken seem to go at the process in very different ways.
My own case is based on normalized prices and my judgement of what the alternative investments are out there.
The no growth scenario I was referring to is one where the company retains a portion of its earnings. And as you stated is rational about using it.
But as it buys back shares the margins continue to decline on the already invested capital due to competitive pressures and/or changes in the business.
That leads to flat or declining earnings. Now if you discount that at 7% you will certainly get a favorable valuation anyway. But I would say that on average, businesses are discounted at a higher level than that.
Clearly someone out there thinks there are issues in this industry. Otherwise the group wouldn't be getting killed. This isn't panic selling or anything. People make mistakes, but they aren't crazy either.
The key to the extent of the undervaluation is understanding the issues that the market is discounting. If the market is simply wrong we should all back up the truck.
In lecturing his students in ETHICS Aristotle said the following:
"...it is a mark of the trained mind never to expect more precision in the treatment of any subject than the nature of that subject permits; for demanding logical demonstrations from a teacher of rhetoric is clearly about as reasonable as accepting mere plausibility from a mathematician."
The most reliable indicator of value you have is the objective data of the numbers and the greatest certainty you can obtain is in your own logical processing of that data.
The following I believe is about as good an explination for the discounting of GPC as there is but it is a far less acceptable answer to that question than the numbers provided for the value question:
GPC's industry like the economy has a problem - over capacity - there are a ton of people out there selling auto parts, office supplies, electrical equipment - what have you. About the only place where there isn't over capacity is in Oil but to participate in that boom you had to buy the stocks while the market was marking them down as the market is marking GPC down now. How do you cure over capacity - with low prices - margins low enough to be unattractive except to the most efficient.
That is my answer to why GPC is down - it is a less reliable answer as to why the stock is down than the answer the numbers provide as to weather or not the stock is cheap. It is less reliable because the nature of the question admits only a better argued rather than a more reliable answer. Someone else may provide a different answer but all we will be able to say of it is that it was either better or worse argued than that given above.