Buffett Would Love This Unglamorous Growth Stock

Warren Buffett became one of the richest men on the planet by making smart investments in what many would consider boring, unglamorous businesses. Property-casualty insurance, railroads, soft serve ice cream, and residential real estate brokerage are a few of the mundane sectors that have enriched him and Berkshire Hathaway (NYSE: BRK.A, NYSE: BRK.B) shareholders. 

One of the most lucrative “boring” sectors I’ve watched throughout my career has been retail aftermarket auto parts. It’s consistent. It’s still extremely fragmented, which means that the biggest players have plenty of room to grow market share organically or through acquisition. And when the stock of one of the biggest players goes on sale, DO NOT miss an opportunity to buy.

The chart below shows how the top four aftermarket auto parts retailer stocks have performed over a three-year period.


The third company, one of the weakest performers, is Genuine Parts Company (NYSE: GPC).It’s,my favorite of the group. Here’s why…

Getting Paid
Genuine Parts has increased its dividend payment steadily over the last 60 years. Over the last decade, the company has grown its dividend at an annual rate of 7%. AutoZone and O’Reilly pay no dividends, while Advance pays out a miserly 0.18%. GPC’s current dividend is considerably more attractive at 2.9%.

#-ad_banner-#‚ÄčLines Of Business
While the top three companies in the space focus solely on aftermarket auto parts distribution at both the wholesale and retail level, automotive accounts for just 52% of Genuine Parts’ annual revenue of $15.3 billion. The other 48% comes from wholesale office products, electrical/electronic materials, and industrial replacement parts and supplies. This final category contributes the lion’s share (30%) through GPC’s well-known subsidiary Motion Industries. So while aftermarket automotive is indeed an incredibly steady and lucrative business, GPC’s revenue stream is truly diversified, providing almost unbeatable stability.

This is evident when comparing the companies in the space side by side. O’Reilly, in the number-three automotive spot, boasts annual revenue of $8.6 billion for 2016. That may sound impressive, but GPC delivers nearly twice that at $15.3 billion.

Management And Balance Sheet
GPC’s management have been excellent stewards. The company’s long-term debt to market capitalization is a mere 4.1%. This is compared to O’Reilly’s 9.2% and sector leader AutoZone’s 29%. While that’s not a bad number, the fact that GPC’s is so low demonstrates management’s skill at delivering true organic growth that translates into shareholder value. This is how the company has delivered an ever-increasing dividend while most competitors don’t even pay one.

How does the growth look? On average over the last five years, the company has grown earnings at a steady 6.5% clip while delivering earnings per share (EPS) growth of 9.2% for the same period.

Risks To Consider: If you haven’t noticed the rapid decline of traditional retail, you’re not getting out enough. And even though it may seem insulated from change, the rise of online retailing has penetrated the aftermarket auto parts space. Amazon (Nasdaq: AMZN) recently announced its intention to enter the segment and it’s hard not to see one of those terribly animated Rock Auto commercials. However, the personal and convenient nature of brick-and-mortar retail, combined with need for expertise for the do it yourself (DIY) customer, should provide a decent amount of insulation. Again, GPC’s diverse business gives the company an extra layer of protection.

Action To Take: The complexion of Genuine Part’s business, the strength of the company’s underlying fundamentals, and consistent excellence of management offer an attractive buying opportunity for long-term-oriented investors.

At a price of about $91, shares currently trade at a 14% discount to their 52-week high. Should the consistency of revenue and earnings growth should continue, a 12- to 18-month price target of $106 is reasonable. Factoring in the dividend, this gain would result in a total return approaching 20%.

Editor’s Note: Buy them. Forget about them. Let them make you a fortune. These are the market’s most promising,most stable cash cows that are poised for rapid growth in the near future. Discover our list right here…