Genuine Parts Earnings: On Track to Reach Full-Year Expectations Despite Slow Domestic Auto Market

Genuine Parts’ GPC 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.

Genuine Parts’ quarterly gross margin of 36.1% was above our 35.4% full-year forecast as it benefited from sourcing and pricing initiatives. However, this was offset by operating costs reaching 28.4% of sales, 50 basis points above our 27.9% full-year estimate, because of wage hikes and technology spending. In the long run, we think it can achieve operating margins that improve to about 9% from the current 7%-8% as cost initiatives take hold. By category, we forecast automotive and industrial segment margins to reach 10% and 12%, respectively, up from about 9% and 11% at present.

Our narrow-moat rating on Genuine Parts is based on its brand intangible asset and cost advantage. As one of the leaders in auto and industrial parts, its relationships with customers, technology, and distribution capabilities provide competitive advantages, in our opinion.