Genuine Parts Earnings: U.S. Sales Underwhelming but Overall Profitability Solid; Shares Undervalued

Genuine Parts’ GPC 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.

Genuine Parts’ sales increased 2.6% against a tough comparison, with 0.6% growth in industrial and 3.9% growth in automotive, as international results outpaced those in North America. The firm kept its full-year outlook for 4%-6% sales growth in both segments and for the overall business. We forecast 2023 sales growth of about 8.5% for automotive and 12% for industrial, and long-run growth of about 4.5% for both (including expected acquisitions).

Genuine Parts achieved segment margins of 8.9% for automotive and 12.9% for industrial, ahead of our full-year estimates of 8.5% and 12.1%. Similarly, its 36.2% gross margin outpaced our 2023 forecast by 50 basis points. Genuine Parts appears to have lost some share in U.S. automotive through select price increases and supply and service issues, but we think it can regain this through its investments. Long-term, we believe it can hold gross and operating margins of about 36% and 9%, respectively.

Genuine Parts marginally lifted its 2023 EPS guidance to $9.20-$9.30 from $9.15-$9.30 and held its free cash flow to equity outlook of $900 million-$1 billion; our estimates are within these ranges. The company repurchased about $172 million in shares in the first nine months of 2023, so it may fall short of our $400 million full-year forecast. Given that the stock now trades at one of the larger discounts to our valuation in the last three years, we view buybacks as favorable.

Our narrow moat rating is based on Genuine Parts’ brand intangible asset and cost advantage, as the company has strong customer relationships, technology, and distribution capabilities.