Company Background (sourced from Yahoo! Finance):
Genuine Parts Company distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, the Dominican Republic, Mexico, and Canada. The company distributes automotive replacement parts for imported vehicles, trucks, SUVs, buses, motorcycles, recreational vehicles, farm vehicles, small engines, farm equipment, and heavy duty equipment; and accessory items used in the automotive aftermarket, such as repair shops, service stations, fleet operators, automobile and truck dealers, leasing companies, bus and truck lines, mass merchandisers, farms, industrial concerns, and individuals through 64 NAPA automotive parts distribution centers and 1,100 NAPA AUTO PARTS stores. It also distributes industrial replacement parts and related supplies, such as bearings, mechanical and electrical power transmission, industrial automation, hose, hydraulic and pneumatic components, industrial supplies, and material handling products primarily for food and beverage, forest products, primary metal, pulp and paper, mining, automotive, oil and gas, petrochemical, and pharmaceutical industries through 509 branches, 14 distribution centers, and 50 service centers. In addition, the company distributes computer supplies, imaging products, office furniture, office machines, general office products, school supplies, cleaning and break room supplies, and healthcare products to approximately 4,000 business product resellers through 41 distribution centers. Further, it distributes wire and cable, insulating and conductive materials, assembly tools, test equipment, and custom fabricated parts to original equipment manufacturers, motor repair shops, specialty wire and cable users, and various industrial assembly markets.
Analysts expect Genuine Parts to grow earnings 8.90% per year for the next five years and I've assumed they can continue to grow at 3.50% per year thereafter. Running these numbers through a two stage DCF analysis with a 10% discount rate yields a fair value price of $84.87. This means the shares are trading at a 8.9% discount to the DCF.
With a current book value per share of $19.36 and TTM EPS of $4.14, the Graham Number is calculated to be $42.47. Currently GPC is trading for a 82.2% premium to the Graham Number.
Average High Dividend Yield:
Genuine Parts' average high dividend yield for the past 5 years is 4.48% and for the past 10 years is 3.97%. This gives target prices of $47.98 and $54.18 respectively based on the current annual dividend of $2.14. The averages are pretty close, but both are skewed by the "Great Recession" valuations plummeting, giving a yield of 6%+ at the depths. I'd expect the high yield to be closer to the 3.5% range going forward, but we'll use the 10 year average of 3.97% to be conservative. Genuine Parts is currently trading at a 42.8% premium to the average high dividend yield valuation.
Genuine Parts' average low PE ratio for the past 5 years is 12.38 and for the past 10 years is 13.69. This corresponds to a price per share of $55.47 and $61.31 respectively based off the analyst estimate of $4.48 per share for fiscal year 2013. If you exclude 2008 and 2009 from the calculations, the average is 14.38 so I'll use the 10 year average for my calculations and that is closer to what I'd expect given more normal times. The 5 year and 10 year low PE price targets are overvalued by 30.5% and 9.4%, respectively. Currently GPC is trading for a 39.5% premium to the 10 year P/E price target.
Average Low P/S Ratio:
Genuine Parts' average low PS ratio for the past 5 years is 0.54 and for the past 10 years is 0.60. This corresponds to a price per share of $49.70 and $54.98 respectively based off the analyst estimate for revenue growth from FY 2012 to FY 2013. Their current PS ratio is 0.92 over the last 12 months. Excluding 2008 and 2009 the average low P/S ratio since 2001 is 0.63. I'll be using the 10 year average in my calculations, since GPC should trade closer to it's historical norms. GPC is currently trading at a 40.7% premium to this price.
Dividend Discount Model:
For the DDM, I assumed that GPC will be able to grow dividends for the next 5 years at the minimum of 15% or the lowest of the 1, 3, 5 or 10 year growth rates. In this case that would be 5.15%. After that I assumed they can continue to raise dividends for 3 years at 75% of 5.15% or 3.87% and in perpetuity at 3.50%. The dividend growth rates are based off fiscal year payouts and don't necessarily correspond to quarter over quarter increases. To calculate the value I used a discount rate of 10%. Based on the DDM, GPC is worth $35.23 meaning it's overvalued by 119.6%.
Genuine Parts' trailing PE is 18.69 and it's forward PE is 15.92. The PE3 based on the average earnings for the last 3 years is 21.65. I like to see the PE3 be less than 15 which GPC is currently well over. Compared to it's industry, GPC seems to be overvalued versus AAP (15.64) and AZO (15.72). All industry comparisons are on a TTM EPS basis. GPC's PEG for the next 5 years is currently at 1.90 while AAP is at 1.25 and AZO is at 0.97. Based on the PEG ratio you're paying more for the growth of GPC versus it's competitors.
Genuine Parts' gross margins for FY 2011 and FY 2012 were 28.9% and 29.0% respectively. They have averaged a 30.6% gross profit margin since 2001 with a low of 28.9% in FY 2011. Their net income margin for the same years were 4.5% and 5.0%. Since 2001 their net income margin has averaged 4.4% with a low of 3.6% in FY 2001. I typically like to see gross margins greater than 60% and at least higher than 40% with net income margins being 10% and at least 7%. GPC is behind my normal metrics for margin, but each industry is different and allows for different margins so we'll see where they stand against the industry. For FY 2012, Genuine Parts captured 168.6% of the gross margin for the industry and 312.5% of the net income margin. Management does a much better job than the overall industry in turning sales into profits, which can be seen in the huge advantage that they have in their margins. This is good news for investors because even in tough economic times, margins can compress but they can still remain profitable while their competitors struggle.
GPC's shares outstanding have been in a really nice downtrend with an average decrease of 1.09% since FY 2003. Over that time they've bought back 10.3% of their shares outstanding. By repurchasing shares, GPC is able to increase EPS and management can return cash to shareholders this way by increasing the ownership stake of the company for all the outstanding shares. Management was buying back large amounts of shares during the depths of the recession buying back 4.1% in FY 2008 and 2.0% in FY 2009. The biggest issue I have with buybacks is when they aren't done on a strategic basis due to undervaluation. If they pay more than fair value for the shares, then they are destroying shareholder value because that money could have been spent in more productive ways.
A negative number for the % change value means shares were bought back by the company and a positive value means the shares outstanding increased.
Genuine Parts is a dividend champion with 57 consecutive years of increases. Their current annual dividend sits at $2.15 for a yield of 2.78%. GPC's annual increases for the last 1, 3, 5 and 10 years have been 10.00%, 6.48%, 5.15% and 5.31%. These numbers are different from the actual quarterly increases since they are based off the dividends paid out during each fiscal year. Their payout ratio has averaged 54.0% since 2001, peaking in 2001 with a 66.1% ratio. It's nice to see that the ratio has come down and settled in around the 50% mark. Having a low payout ratio leaves more room for management to increase the dividend without overly burdening the underlying business.
Genuine Parts' free cash flow has been great since FY 2001 with every year having a positive cash flow. Their free cash flow payout ratio has averaged only 48.2% since FY 2001. This is lower than the payout based on earnings which is good to see. Annual total shareholder return when accounting for buybacks plus dividends has averaged 68.9% of FCF since FY 2001. Total yield, % shares bought back + dividend yield has averaged 4.50% since FY 2002 which is a pretty solid level. Although far from the 7%+ mark seen in FY's 2008 and 2009.
Return on Equity and Return on Capital Invested:
GPC's ROE has average 17.67% since 2001 and has been in a steady uptrend since then except for the dip down in FY 2009. Their ROCI has averaged a very solid 14.9% since 2001 and like their ROE has been in a very solid uptrend except for in FY 2009. I don't necessarily look for any absolute values, rather I like to see stable to increasing levels over the long term.
Revenue and Net Income:
Since the basis of dividend growth is revenue and net income growth, we'll now look at how GPC has done on that front. Their revenue growth since 2001 has been okay at best with a 4.4% annual increase and their net income has been growing at a 6.2% rate. Since their net income has been growing faster than revenue, their net income margin has increased from 4.2% to 5.0% between FY 2003 and FY 2012. Over that time, GPC only suffered a decline in revenue during FY 2009 but has grown every other year. I love seeing the net income on a steady rise because it means the company is turning more dollars of sales into profits.
The average of all the valuation models gives a target entry price of $54.53 which means that Genuine Parts is currently trading at a 41.9% premium to the average.. I've also calculated it with the highest and lowest valuation methods thrown out. In this case, the DCF and DDM valuations are removed and the new average is $51.77. GPC is trading at a 49.4% premium to this price as well.
Assuming that GPC can grow their earnings and dividends at the rates that I assumed you're looking at okay returns over the next 10 years. In 2023, EPS would be $7.84 and slapping an average PE of 14.84 gives a price of $116.37. Over the next 10 years you'd also receive $28.01 in dividends for a total return of 186.80% which is good for a 6.45% annualized rate. If you purchase at my target entry price of $54.53 your projected 10 year total return is 264.76% for an annualized return of 10.23%.
Overall, I would say that Genuine Parts Company is currently at overvalued. It's on the high end of it's typical yield, P/E and P/S ratios although the DCF valuation shows it to be undervalued. The value just isn't there at current prices. The business is still solid but I would wait for a pullback in the share price before siding my hard earned cash with GPC. Being in the auto parts industry, their business is cyclical in nature. In January of this year, the average price of a passenger car in the United States topped 11 years. This could be seen as a good and bad thing for GPC. Good because older vehicles require more maintenance and therefore will drive customers to one of their many stores, but bad because more people could start looking to purchase new cars which require less maintenance and therefore less demands for GPC's parts. GPC won't be going anywhere but this is something to keep an eye on for the time being.
Using the historical dividend yield, PE, and PS ratios, the average valuation or fairly valued price would be around $61.20 and the high valuation price would be $69.23. It's currently trading right above the high valuation price so I won't be buying at current prices. I'd like to own GPC but would require a pretty hefty pullback in price to account for the slower dividend growth. If higher dividend growth returns then this would change the investment thesis on GPC. One option would be to sell puts on in order to get a lower cost basis; however, given how much GPC is currently above my fair value price point the premium is most likely not there to provide a decent return on your cash.
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What do you think about Genuine Parts Company as a DG investment at today's prices?
*Note: If anyone knows how to make a stacked column chart in Excel with multiple columns per entry, an explanation would be nice. I need it for the dividend analysis section with cash flow because the last chart could look a lot better.