On Nov 26, we downgraded Genuine Parts Company (GPC) to Underperform. The downgrade was based on the company’s weak third quarter results, rising competition and uncertainty in the macroeconomic environment.
Why the Downgrade?
On Oct 18, Genuine Parts’ reported a 1% year over year increase in earnings per share to $1.12 in the third quarter of 2013 from $1.11 reported in the year-ago quarter. However, earnings missed the Zacks Consensus Estimate by 8 cents. The third quarter was very challenging for Genuine Parts owing to the poor performance of the non-automotive businesses, which was partially offset by better results from the Automotive Group.
Revenues in the quarter grew 9.2% to $3.68 billion, missing the Zacks Consensus Estimate of $3.74 billion. The year-over-year improvement was due to hike in revenues from the Automotive Parts segment, partially offset by decline in demand in non-automotive businesses.
Following the release of the third quarter results, the Zacks Consensus Estimate for 2013 decreased 5.3% to $4.14 per share. The Zacks Consensus Estimate for 2014 dropped 4.1% to $4.63 per share. Currently, Genuine Parts retains a Zacks Rank #5 (Strong Sell).
We are concerned about the sluggish demand in the Industrial, Electrical, and Office Products segments. Weak demand led to low revenues in these segments during the quarter. The company also faced a challenging first quarter of 2013 due to weak sales in these segments.
Moreover, unfavorable economic conditions, including low economic growth, high unemployment and higher energy costs, have adversely affected the credit markets, consumer and business confidence, and commodity prices. This uncertain economic situation is a challenge for Genuine Parts.
In addition, rising competition from peers, including LKQ Corp. (LKQ), is highly challenging for the company. Price competition in the competitive environment will mar the revenues and earnings of Genuine Parts.
Other Stocks to Consider
Motorcar Parts of America Inc. (MPAA) and Standard Motor Products Inc. (SMP) with a Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy), respectively, are performing well in the auto and truck industry.