Company Reports

Narrow-moat Genuine Parts announced CEO Paul Donahue’s plan to step down from his role in June 2024 and transition to the executive chairman position, marking an end to his eight years at the helm. William Stengel was selected to succeed Donahue, which is unsurprising given he was appointed president in 2021 and COO in 2023. Before joining Genuine Parts five years ago, Stengel was president and CEO of HD Supply Facilities Maintenance, a wholesale distributor of maintenance, repair, and operations products. With adequate industry experience and substantial contributions to improve Genuine’s efficiency across the automotive parts and industrial distribution businesses, we look favorably upon Stengel’s appointment to CEO and plan to leave our Standard Capital Allocation Rating and $150 fair value estimate unchanged. We think shares are fairly valued.

With a solid presence in the global automotive distribution industry that is cemented by its footprint of 9,800 affiliated stores, we believe Genuine Parts is well-positioned to continue serving its professional customer base in future years. About two thirds of Genuine’s automotive sales are derived from North America (primarily the United States) where we estimate the firm’s Napa Auto Parts brand boasts a mid-single-digit domestic share of the highly fragmented commercial automotive aftermarket. Given Genuine’s professional customer base tends to value the quick sourcing of necessary parts for sake of turning over service bays, the firm utilizes its distribution network to procure and deliver a vast assortment of automotive parts to its thousands of affiliated retail locations, allowing for ample local product availability. In turn, affiliated retail locations leverage the readily available inventory assortment to service time-sensitive customer demand. In our view, the firm stands to benefit from its established distribution system, strong supplier relationships, and an aging vehicle fleet for the foreseeable future. However, growing electric vehicle adoption could pose a threat to its long-term competitive standing.

Narrow-moat Genuine Parts delivered mixed first-quarter results as expanding segment margins (up 30 basis points to 9.4%) helped offset lackluster demand across its automotive and industrial distribution businesses. Despite the weak top line—sales growth of 1% excluding currency impacts underperformed our 2.8% forecast—the shares soared over 10% as management reaffirmed its full-year outlook for low-single-digit comparable sales growth and adjusted earnings per share of $9.80-$9.95, which lands closely in line with our expectations. We expect to see sequential top-line improvement as annual comparisons are bound to ease, leaving our outlook mostly intact. We plan to modestly raise our $146 fair value estimate due to the time value of money and a slight increase in our segment margin forecast.

With a solid presence in the global automotive distribution industry that is cemented by its footprint of 9,800 affiliated stores, we believe Genuine Parts is well-positioned to continue serving its professional customer base in future years. About two thirds of Genuine’s automotive sales are derived from North America (primarily the United States) where we estimate the firm’s Napa Auto Parts brand boasts a mid-single-digit domestic share of the highly fragmented commercial automotive aftermarket. Given Genuine’s professional customer base tends to value the quick sourcing of necessary parts for sake of turning over service bays, the firm utilizes its distribution network to procure and deliver a vast assortment of automotive parts to its thousands of affiliated retail locations, allowing for ample local product availability. In turn, affiliated retail locations leverage the readily available inventory assortment to service time-sensitive customer demand. In our view, the firm stands to benefit from its established distribution system, strong supplier relationships, and an aging vehicle fleet for the foreseeable future. However, growing electric vehicle adoption could pose a threat to its long-term competitive standing.

Narrow-moat Genuine Parts delivered fiscal fourth-quarter results that mostly fell in line with our expectations, though continued strength in industrial distribution was partially offset by weaker-than-expected performance in its domestic automotive business. Still, we do not expect to materially alter our $146 fair value estimate and note that shares currently trade in fairly valued territory.

We lowered our fair value estimate for narrow-moat-rated Genuine Parts to $146 from $161 previously, and currently view shares as fairly valued. The lower fair value estimate primarily stems from our more subdued long-term operating margin forecast of 8.0%, from 9.5%. While we expect the firm to deliver modest margin expansion in the future as it prioritizes investments to improve operational efficiencies, we believe the company’s margin profile has already benefitted significantly from outsize comparable sales growth and cost leverage in recent years, making us wary of the durability of current margin levels if demand shows signs of abating. We forecast a long-term EBITDA margin for the industrial segment of about 11.5%, about 300 basis points ahead of 2019 levels but down from its current trajectory of around 12.5%. We also forecast an EBITDA margin of 9.8% for the firm’s automotive segment, up about 40 basis points over its 10-year average.

With a solid presence in the global automotive distribution industry that is cemented by its footprint of nearly 9,700 affiliated stores, we believe Genuine Parts is well-positioned to continue serving its professional customer base in future years. About two thirds of Genuine’s automotive sales are derived from North America (primarily the United States) where we estimate the firm’s Napa Auto Parts brand boasts a mid-single-digit domestic share of the highly fragmented commercial automotive aftermarket. Given Genuine’s professional customer base tends to value the quick sourcing of necessary parts for sake of turning over service bays, the firm utilizes its distribution network to procure and deliver a vast assortment of automotive parts to its thousands of affiliated retail locations, allowing for ample local product availability. In turn, affiliated retail locations leverage the readily available inventory assortment to service time-sensitive customer demand. In our view, the firm stands to benefit from its established distribution system, strong supplier relationships, and an aging vehicle fleet for the foreseeable future. However, growing electric vehicle adoption could pose a threat to its long-term competitive standing.

As a top distributor of automotive and industrial parts (roughly two thirds and one third of net sales, respectively), Genuine Parts benefits from industry dynamics favoring its scale-enabled service levels. We believe it will use its cost advantage to boost sales through its ability to offer a wide variety of parts on short order, building inventory and cost leverage as sales rise while fortifying brand value in a way that subscale peers cannot economically replicate.

Genuine Parts’ third-quarter sales were disappointing, as comparable automotive sales in the United States fell 2.9%, but margins held up well and guidance was little changed. We do not expect to make any material change to our $160 fair value estimate. We view the shares, down about 11% on the day of the report, as undervalued.

As a top distributor of automotive and industrial parts (roughly two thirds and one third of net sales, respectively), Genuine Parts benefits from industry dynamics favoring its scale-enabled service levels. We believe it will use its cost advantage to boost sales through its ability to offer a wide variety of parts on short order, building inventory and cost leverage as sales rise while fortifying brand value in a way subscale peers cannot economically replicate.

Genuine Parts' second-quarter sales growth and operating margin of 5.6% and 8%, respectively, keep it on pace to achieve our respective full-year estimates of 5.5% and 7.5%. By segment, growth rates of 5.4% and 5.9% for automotive and industrial, respectively, were in line with 4%-6% full-year company guidance and our 5.5% estimates for both. Moreover, we expect to lift our full-year EPS estimate of $9.06 slightly after the firm raised its guidance range by $0.20 to $9.15-$9.30 on heightened expectations for gross margin, international automotive revenue, and industrial profitability. Yet, shares dropped by a high-single-digit percentage on the report, possibly because U.S. automotive remains weak (comparable sales up just 1% in the quarter) and slowing revenue trends in both of its segments in June may have precluded an even larger guidance boost. As it stands, we anticipate minimal revisions to our forecast and do not expect to make any material change to our $158 fair value estimate, leaving shares fully valued.

As a top distributor of automotive and industrial parts (roughly two thirds and one third of net sales, respectively), Genuine Parts benefits from industry dynamics favoring its scale-enabled service levels. We believe it will use its cost advantage to boost sales through its ability to offer a wide variety of parts on short order, building inventory and cost leverage as sales rise while fortifying brand value in a way subscale peers cannot economically replicate.

As a top distributor of automotive and industrial parts (roughly two thirds and one third of net sales, respectively), Genuine Parts benefits from industry dynamics favoring its scale-enabled service levels. We believe it will use its cost advantage to boost sales through its ability to offer a wide variety of parts on short order, building inventory and cost leverage as sales rise while fortifying brand value in a way subscale peers cannot economically replicate.

Our $154 per share valuation of narrow-moat Genuine Parts should rise by a low-single-digit percentage as its industrial unit posted strong comparable sales (12% increase) that helped offset a lackluster start to the year in its domestic automotive operation (low-single-digit increase). With the automotive segment affected by transitory factors such as weather and difficult comparisons and the industrial unit performing in line with our long-term targets, we still forecast mid-single-digit top-line growth rates and high-single-digit operating margins over the next decade, on average. We suggest investors seek a more attractive entry point.

As a top distributor of automotive and industrial parts (roughly two thirds and one third of net sales, respectively), Genuine Parts benefits from industry dynamics favoring its scale-enabled service levels. We believe it will use its cost advantage to boost sales through its ability to offer a wide variety of parts on short order, building inventory and cost leverage as sales rise while fortifying brand value in a way subscale peers cannot economically replicate.

We plan to bump up our $148 per share fair value estimate by a low-single-digit percentage on narrow-moat Genuine Parts after strong fourth-quarter earnings outpaced our top- and bottom-line estimates; however, we suggest investors seek a more attractive entry point as shares continue to trade at a premium.

As a top distributor of automotive and industrial parts (roughly two thirds and one third of net sales, respectively), Genuine Parts benefits from industry dynamics favoring its scale-enabled service levels. We believe it will use its cost advantage to boost sales through its ability to offer a wide variety of parts on short order, building inventory and cost leverage as sales rise while fortifying brand value in a way subscale peers cannot economically replicate.

Our $141 fair value estimate for narrow-moat Genuine Parts should not change much after the firm posted solid third-quarter earnings despite an unsteady economic backdrop. The automotive and industrial units are showing resilience consistent with our view that Genuine Parts has durable competitive advantages, and our long-term forecast still assumes mid-single-digit annual revenue growth rates and high-single-digit operating margins over the next decade. Still, we suggest investors seek a more attractive entry point as the shares seem to be priced with little room for execution error.

As a top distributor of automotive and industrial parts (roughly two thirds and one third of net sales, respectively), Genuine Parts benefits from industry dynamics favoring its scale-enabled service levels. We believe it will use its cost advantage to boost sales through its ability to offer a wide variety of parts on short order, building inventory and cost leverage as sales rise while fortifying brand value in a way subscale peers cannot economically replicate.

Our $137 per share fair value estimate of narrow-moat Genuine Parts should not change much after it announced second-quarter earnings, with its industrial and automotive units showing strength despite inflation and macroeconomic uncertainty. We see little reason to alter our long-term forecast (mid-single-digit annual revenue growth rates, high-single-digit operating margins over the next decade) and suggest investors seek a more attractive entry point.