Genuine Parts Earnings: Industrial Unit Propels Solid Start to 2023 Despite U.S. Auto Parts Softness

Our $154 per share valuation of narrow-moat Genuine Parts GPC 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.

Genuine Parts’ industrial unit performed well despite economic uncertainty, which we believe reflects its increasing revenue diversity, particularly after the Kaman acquisition last year. While its automotive operations outside the United States also performed well (total segment comparable sales growth of 7% versus around 3% domestically), the sluggish start in its home market has prudently spurred increased cost vigilance. Management lifted 2023 guidance, calling for $8.95 to $9.10 in diluted EPS (previously $8.80 to $8.95), and our $8.94 estimate should rise into the new range. We believe the company can hit its 2025 EPS target ($11.00 to $11.50; our estimate is near the high end of the range), particularly as it pursues bolt-on acquisitions.

The domestic automotive operation’s comparable growth lagged the high-single-digit inflation rate that the unit saw in the quarter, contributing to a 60-basis-point operating margin slide for the full segment (to 7.5%). We attribute the slowdown to a difficult comparison (12% in the same period last year) rather than any change in industry dynamics, which we believe remain recession resistant as motorists concentrate on keeping their vehicles on the road (rather than upgrading) in times of economic strain. We still foresee segment operating margins reaching 10% over the next 10 years.