At 19, there is a large margin of safety for anyone purchasing GPC shares. Although margins may be under some pressure, I don't beleive that the fundamentals of this business have changes or that the solid long term track record is about to end. Unless the dividend is cut (and there is almost no chance of that), the stock price is going to have trouble going much lower. But who knows for sure? The market is irrational on the upside and the downside.
I'm long at an average cost of 20.25. If I didn't have a full position already, I would be buying heavily at these levels.
>>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.<<
I understand your point. But there are times when I can see the issues in an industry that are depressing the stocks and feel fairly certain that I understand them well enough to draw some reliable conclusions about the future. I'm not at that point here. Maybe I am asking for too much, but that's my style. I put a lot of weight on understanding.
The large margin of safety is dependent on a continuation of current earnings + growth of 5+% or so going forward.
Granted that Federal Mogul is an overleveraged basket case with a lot of issues, but they are missing badly this quarter partly because of continued problems in the domestic autoparts business. I have yet to hear of anyone that is making the case that it's a cyclical or temporary issue.
Point being that if GPC continues to see its margins slip (something that I have no strong view on either way because I just started looking at this company and industry) then earnings could be flat or even down for awhile in the near future.
A company like that may not be worth much more than 10x earnings as the ROC and ROE slowly declines.
Rather than debate the exact value - since that's mostly subjective and dependent on the model used, I wish someone would make the case that GPC is either immune to the current issues or that they are clearly temporary, etc...
If you can do that I'm going to back up the truck!
But I think the surface cheapness, something that anyone can see, may be misleading or at risk if you are "just assuming" the growth will be there because it always has been in the past.
To me it's a matter of whether it's cheap or very cheap. There's lots of cheap stocks out there so I'd rather focus on very cheap.
The first thing I look at when evaluating margin of safety is the balance sheet. GPC's balance sheet has always been strong and should remain so. Comparisons to Federal Mogul are meaningless.
Now, I'm willing to accept the hypothesis that demand for replacement parts may decline somewhat due to more reliable new cars. But the idea that replacement parts are somehow going to vanish seems absurd to me. In addition, the number of cars on the road increases each year along with population growth and increasing affluance (2 and 3 car households).
It's rare to find quality companies trading at these multiples. The company has the track record, is well managed, and has an excellent balance sheet, AND a buy back program. Even if earnings only grow at the rate of nominal GDP growth over the next 10 years, this should be a very profitable investment. The dividend is very safe as well. While this stock isn't going to make me rich overnight, it also isn't going to be cut in half.
If I hadn't backed up the truck at 20, I would be doing so now. I would say that the stock is very cheap, but that's just my humble opinion.
1. GPC is diversified and thus complex. There is no reason why any one piece of this business should be immune to the risks its competitors face. Nor, however, is there any reason to believe that any loss in one sector will not be offset by a gain in another. If you are looking for qualitative certainty, you will not find it here. You are going to have to go with the math and from there only you know how risk averse you are.
2. There are simple calculators out there that can be used to factor in various growth assumptions leading to desired returns. I use the intrinsic value calculator at Quicken.Com. For GPC if you want to protect yourself against zero growth forever then you need a price approaching $15. If you want to protect yourself against negative growth you would go lower than that. By these standards, GPC is only cheap -- not very cheap.
3. A hardcore value player would say I want to own the company at 50% of what it is worth. If you say GPC is worth only that price that assumes no growth, then very cheap is half of $15 or about $7.50. A lot of companies sell at large discounts to book -- it is only my opinion that GPC will not.
4. I say GPC may be worth 40 and half of that is 20 -- I see 1 maybe 2 GPC type deals in a year. I can either take that deal or I can stay in cash. If I take the deal I likly will double my money in 5 years for a 15% annual return. If I stay in cash I make whatever the FED says the rate for cash will be - something between 3-7% given recent history. For me the risk of remaining in cash overwhelms the risk that I may have factored in a small amount of historicaly supported maybe no longer relevant growth.