Stock of the week: Genuine Parts Company

Summary:
- Genuine Parts Company focuses on replacement parts for automotive and industrial sectors
- US remain the key market for the company
- Genuine Parts expanded into two new European countries in early-2019
- Limited earnings and revenue drop during the global financial crisis
- Outstanding track record of dividend payouts
- Genuine Parts Company (GPC.US) stock bounced off the upward sloping trendline

Genuine Parts Company (GPC.US) is not a company we hear a lot about. It conducts its business through numerous subsidiary that seldom hold the same name as their parent company. Nevertheless, the stock is well-known to the dividend investors due to its outstanding dividend policy and payout track record. In this short analysis, we will look at the company’s business.

Genuine Parts Company generates most of its revenue in the United States. However, taking a look at the chart with non-US revenue breakdown, one can see that the company expanded into Australasia and Europe earlier this decade and saw solid growth in those regions. Source: Bloomberg, XTB Research

Genuine Parts Company was founded in mid-1928 and specializes in the distribution of replacement parts. The company is divided into three major business segments: Automotive, Industrial and Business. The Automotive segment supplies replacement parts for cars while the Industrial unit distributes replacement parts for industrial devices. The third and the smallest segment - Business - supplies resellers with office products, furniture, healthcare products or security items. The company conducts its business through a number of distribution centres and vast amount of small, retail outlets.Genuine Parts Company is growing primarily through acquisitions, especially in the automotive sector, but also holds a solid record of organic sales growth. Its latest corporate action - purchase of the Dutch PartsPoint Group - was completed in early-June and has provided the company with a footprint in the Netherlands and Belgium.

The company’s operations focus mostly on the North America, especially the United States. However, Genuine Parts Company has some exposure to foreign markets as well. Apart from the US, it is also present in Europe, Australia, New Zealand, Canada and Mexico. Given that the US-Mexico tariff talk is over now and Antipodean countries have not been a subject of the recent trade conflicts at all, the only part of the company’s business that is exposed to the ongoing protectionism push of the President Trump is the European business. Luckily for Genuine Parts shareholders, operations in Europe accounted for only 10% of the company’s sales in 2018 causing any impact to be limited. However, as we have noted in the previous paragraph, the company has recently expanded into two new European countries therefore significance of the Old Continent for the company may rise over time. Of course, there is a risk that the US-China trade war disturbs some of the supply channels for the company but given that trade truce was struck over the past weekend, the outlook does not look too worrying for now. 

Automotive is the biggest segment of the Genuine Parts Company. However, Industrial unit saw significant improvement in the previous year and managed to increase its importance in the company’s structure. Source: Bloomberg, XTB Research

Automotive segment is by far the biggest business unit of Genuine Parts Company measured by revenue. The segment accounted for 56% of sales in 2018 while Industrial unit generated 34% of company’s revenue. Sales of the automotive sector are highly cyclical and it may be a source of concern given that the global economy shows signs of a slowdown. However, Genuine Parts Company is a bit different from classic automotive companies as it focuses on replacement parts and accessories. While consumers may be able to postpone the purchase of a new car at times of an economic downturn, they may find it hard to postpone repairs as in some cases they are critical to keep the car usable. Thanks to this, Genuine Parts Company is less cyclical than, for example, car parts manufacturers, whose core business focuses on supplying carmakers. In turn, the company saw revenue and earnings drop of a smaller scale during the global financial crisis than “broad” automotive sector.

Full-year outlook reaffirmed after Q1 earnings

The company had a good start to 2019. Revenue for the first three months of the year increased 3.3% YoY to $4.7 billion. Sales increased in each business segment with the biggest gain being spotted in the Industrial unit. Situation was mixed when it comes to the operating profit. Total operating profit saw an increase of 0.93% YoY but it was led solely by the Industrial unit (+7.9% YoY). Automotive segment saw operating income decline by 3% YoY and Business segment performed flat year-over-year. Net income of the company declined from $176.58 million in Q1 2018 to $160.25 million in Q1 2019. An annual decline in net earnings was a result of significant increase in corporate expenses that was related to the sale of the Mexican subsidiary, Grupo Auto Todo. Along with the release of Q1 earnings the company reaffirmed forecasts for the full-2019. The company expects sales to increase by 3-4% in the current year while diluted EPS should fall into $5.56-5.71 range, an increase of 1.1-3.8% YoY. Genuine Parts Company will release earnings report for the second quarter of 2019 on 18 July.

Genuine Parts Company (GPC.US) has been rising dividends each year for the past 63 years! Taking a look at the chart above, one can see that the company kept its payout ratio at reasonable levels for the past 15 years hinting at dividend safety. In most periods dividend increase was higher that pace of price increase in the US. This shows that the company's dividend is growing not only in nominal terms, but in real ones as well. Source: Bloomberg, XTB Research

Last but not least, a thing that makes Genuine Parts Company an outstanding stock is its track record of dividend payouts. The company has distributed excess cash to its shareholders each year since it went public in 1948. While paying dividends for 70 consecutive years can be considered a feat on its own, 2018 was also 63rd year of consecutive dividend increases! No other S&P 500 member has a longer record of annual dividend increases while the only two that match it are Procter & Gamble (PG.US) and Dover (DOV.US). Taking a look at the chart above, one can see that Genuine Parts Company has kept its payout ratio quite stable and in a reasonable range for the past 15 years and, unless major deterioration in operations occurs, its continuity does not seem to be threatened. Note that even during the financial crisis when the company saw declining earnings, the payout ratio stayed below 65%. Dividend is expected to increase from $2.88 in 2018 to $3.05 per share in 2019.

Genuine Parts Company (GPC.US) has been trading sideways since the turn of 2014 and 2015. However, as one can see the price has been painting higher lows since mid-2017 and, in turn, an ascending triangle pattern surfaced. The stock has recently bounced off the upward sloping trendline, that served as the lower limit of the pattern, and is now testing the resistance level at the $105.80 handle, marked by highs from July 2016 and December 2018. In case it is breached, the upper limit of the aforementioned triangle pattern ($107.50) could be in danger. Source: xStation5