Genuine Parts Company Stock: 4 Reasons To Re-Enter (NYSE:GPC)

Right here on the Lab, we love Real Components (NYSE:GPC), and at this time, we’re again to touch upon the newest firm growth. Given the minus 22.5% on a year-to-date inventory worth efficiency, we consider there are a minimum of 5 causes to re-enter. Nonetheless, to assist our funding thesis, we should always recall our MACRO to MICRO supportive purchase: 1) elevated automotive complexity, 2) getting old automotive inhabitants growth, 3) efficient capital allocation with dividend aristocrat standing, and 4) fewer new automobiles bought with greater upkeep restore.

Wanting again to our publication known as “Lengthy Solely,” Real Components remains to be benefitting from the getting old automotive throughout its geographical areas. Specifically, the North American common automotive age handed from 12.1 to 12.5 years old, whereas the EU common automotive age handed from 11.8 to 12 years old.

Why are we nonetheless supportive?

Right here on the Lab, we consider that Real Components will ship long-term returns for the next 4 causes:

1. (Strong outcomes – Fig 1) Q3 outcomes had been a beat on the EPS stage, due to greater margins. Intimately, GPC reported $2.49 versus consensus estimates of $2.39. The Wall Road beat was supported by a better working margin within the firm’s Industrial section. The division is absolutely benefitting from the profitable KDG acquisition. Whereas top-line gross sales development in each industrial and automotive decelerated sequentially, GPC’s backside line was supported by stable margins and resulted in EBIT beating consensus. Wanting on the Automotive comps, we should always recall a deceleration within the US market (from a plus 1% in Q2 to a minus 3% in Q3). This creates a beautiful alternative to re-enter the fairness story (GPC inventory worth remains to be down from Q3 reporting day);
2. (Real Components comps are costlier). Right here on the Lab, trying to the GPC friends, we report that the corporate trades at a 2024 P/E beneath 14x, which we consider is overly punitive given its diversified enterprise combine and monitor report. Autopart friends, resembling O’Reilly Automotive, trades at a P/E of greater than 20x, whereas AutoZone Inc. trades at a 2024 P/E of about 17x (once more, a premium in comparison with GPC). The one comp that’s buying and selling beneath GPC is Advance Auto Components; nonetheless, the corporate lately changed its management team, and we see extra draw back than upside;
3. (Proper capital allocation priorities – Fig 2) The corporate has a protracted historical past of elevating its DPS yearly. This marked 67 years, and now it yields 2.83%. The corporate’s dividend and buyback exercise mixed comprised 50% of GPC’s capital deployment over the past years. Regardless of that, the corporate is a number one trade consolidator with a confirmed report of accretive acquisitions. Regardless of that, the corporate has maintained very conservative leverage with just one.56x whole debt to EBITDA on a TTM foundation;
4. (Increased steerage – Fig 3) The earnings development story remained intact, and the corporate reaffirmed its gross sales outlook, narrowing to the upwards of its EPS backside steerage. In numbers, the up to date diluted EPS moved from $9.15 to $9.30 to $9.20 to $9.30. We consider the inventory has been overly punished on decrease gross sales tendencies, primarily on account of poor administration communication. Having mentioned that, there’s a margin growth story to cost in, and GPC is price watching.

Fig 1

Fig 2

Fig 3

Updating our numbers, we derive a 4.5% income development in 2023, at $23.08 billion in gross sales. In our 2024 forecast, top-line gross sales are at 3.3% to $23.8 billion. On a administration 2023 outlook, we forecast an adjusted EBITDA of $2.15 billion with a margin of 9.3%. In 2024, the EBITDA margin might be set at 9.6% for a complete worth of $2.29 billion. Our adjusted EPS reached $9.32 and $10.14 in 2023 and 2024, respectively. On a twelve-month foundation, our FCF yield is above 9% and absolutely helps the continuing dividend yield. In our numbers, given GPC dividend aristocrats’ standing, we forecast a DPS hike from $3.8 to $3.99 per share, confirming a 5% dividend development (consistent with margins development).

Conclusion and valuation

A uncommon synchronized development in each GPC divisions helps our obese score. Moreover, there was a cultural change with new management trying to faster-growing finish markets, with a supportive view on scaling IT infrastructure, leveraging the provision chain, and bettering processes. Our P/E a number of is about at 16x (consistent with GPC pre-COVID-19 a number of), and on a twelve-month foundation, with our EPS at $10.14, we derive a worth goal of $162 per share (from $165 per share). Because the US auto aftermarket will seemingly normalize and GPC worldwide markets decide up with extra earnings weight, we consider the corporate is extra defensive vs. most US comps. Draw back dangers to our goal worth embrace a slowdown in miles drive within the EU and the USA, greater competitors and on-line channel shift, failure in accretive M&A, and slower-than-expected financial restoration.