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Risk-Reward With Genuine Parts

- By Jonathan Poland

Regardless of what happens in the next evolution of automotive automation, part suppliers will continue to be a viable model. Unlike pure play stores like O'Reilly Automotive (ORLY), Advanced Auto Parts (AAP) and AutoZone (AZO), Genuine Parts (GPC) operates a hybrid model thanks to multiple subsidiaries across automotive and industrial parts, electrical components and office products.


Business is good

Since 2009, the company has gone from $400 million in net income on $10 billion in annual revenue to over $800 million in profit on $18.7 billion in sales. In that time, gross margins rose, it bought back 8% of its stock, and it kept capital spending under 30% of its net income. The company is also a great dividend producer, with dividend increases every year in the last decade, and a current yield of 2.7% .

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The company generates the majority of its sales (56%) from the large network of more than 6,000 auto part stores under the NAPA Auto Parts brand with the majority of these stores being independently owned and operated. However, its industrial group Motion Industries generates a healthy $7 billion a year in revenue for Genuine Parts.

In February, Genuine Parts released fourth-quarter numbers, seeing comparable growth of 4.6% year-over-year, and expansion across each of its three business segments: Automotive (11.4%), Industrial (8.7%) and Business Products (1.6%) as well as an improved gross margin rate of 33.5%. This bodes well for 2019 as the the company looks for earnings just shy of $6 per share.

During the housing crisis in 2008 and 2009, Genuine Parts stock was actually pretty resilient, as most people still needed personal transportation. Fast forward 10 years and the same is still true. Yes, we're becoming more dependent on ride sharing and free delivery, but there are still north of 2 billion cars on roads worldwide. Cars will still need parts and while the American population increasing;y moves into cities, 50% of us still live outside major metropolitan areas.

Peak car use is a long way off from mass acceptance, but Genuine Parts continues to diversify its model with management fairly aggressive on the M&A front. It closed on the purchase of robotics and automation company Axis New England and Axis New York in February, which is expected to generate about $55 million in additional annual sales, but has possibly the greatest upside long term.

In comparison to the pure-play parts stores, AutoZone ($24.8 billion cap) and O'Reilly ($30.2 billion cap), Genuine Part's market capitalization of $15.8 billion is a bargain, even if Genuine Parts doesn't have the same profit margins as the the other two.

Disclosure: I am not long or short any stock mentioned.

This article first appeared on GuruFocus.