Genuine Parts Earnings: Shares Plunge on Weak Sales and Steep Margin Degradation

Shares of narrow-moat Genuine Parts plunged 20% on Oct. 22 after third-quarter results missed expectations. Companywide comparable sales declined 0.8% and segment operating margin fell 170 basis points to 8.7%, well below our 10.3% forecast. Inflationary pressures and the negative effect of sales deleverage proved more acute than we anticipated. In light of weak end-market demand and cost inflation, management cut its guidance for 2024 adjusted earnings per share to $8.00-$8.20 from $9.30-$9.50. We plan to bring our full-year EPS forecast into a range that is consistent with management’s updated outlook, which implies adjusted operating margin of around 6.5% (versus our 7.5% forecast previously). We still think Genuine Parts enjoys a competitive edge and can earn around a 7.5% operating margin longer term as efficiency initiatives and the integration of recent acquisitions materialize. But profits are unlikely to inflect positively without an uptick in end-market demand, the timing of which remains uncertain. As such, we think profit recovery may span multiple years. We anticipate lowering our fair value estimate by around 10% but consider the selloff overdone.