The bear market investors have been dreading is already here for many individual stocks. While the S&P 500 is down about 7% from the all-time high it achieved in May, roughly a fifth of the index's components are well into bear territory, having plunged 20% or more from their peaks.
The firm, best known for its NAPA stores, has seen its stock plummet nearly 25% from last December's $109 peak. The selloff is an over-reaction to a relatively minor catalyst -- a few quarters of mixed earnings reports stemming from strong dollar headwinds and transient bouts of inconsistent product demand. But this means one of history's leading dividend aristocrats, a company that increases its dividend at least 25 consecutive years, is now attractively priced.
How GPC Dominates In Auto Parts
Last December, Genuine Parts was trading for around 23 times trailing 12-month earnings. Now the stock carries a much lower 18-times multiple, which is back in line with its five-year average and about a 5% discount to the market's price-to-earnings ratio of 19. The price-to-sales ratio of 0.8 is half the industry average, and the 3% yield is ten times the industry average.
Looking forward, yields should stay robust as Genuine Parts leverages its dominance of the auto parts sector, which accounts for 55% of total sales. The firm's 1,100 NAPA stores have made it an especially strong force in the "do-it-for-me" commercial market, where Genuine Parts generates 70% of auto parts revenue through sales to vehicle maintenance and repair specialists. The remaining 30% comes from the do-it-yourself retail market.
It's an advantageous mix because "the $59 billion domestic DIFM market presents greater growth opportunities than its $47 billion DIY counterpart," points out Morningstar analyst Adam Fleck. And it all comes down to scale. Since the DIFM arena is more fragmented, it's an easier place for a larger player like Genuine Parts to boost market share and performance metrics.
The firm is already proving this. Compared with the industry averages, Genuine Parts has substantially higher returns on assets and equity, two key measures of management's ability to profitably allocate capital.
At $15.5 billion, total annual revenue is 55% greater than that of DIY-focused auto parts retailer AutoZone Inc. (NYSE: AZO), which generates only a fifth of sales in commercial markets. Genuine Parts has an edge in sales and net income growth, too, posting gains 54% and 78%, respectively, since 2009 versus 46% and 72% for AutoZone.
Top-line Growth Is Accelerating
The firm's performance advantages could widen as profitable smaller rivals are absorbed and complementary businesses expand. Already, top line growth is up substantially since Genuine Parts acquired 30% of leading Australian auto parts supplier Exego Group in 2012 and then completed the acquisition the following year. The deal "opened up growth opportunities in Australasia that are not yet available to domestic competitors," Morningstar's Fleck stresses.
Since initiating its Exego stake, Genuine Parts has increased total revenue by more than 6% annually, compared with about a 4% growth rate during the three prior years. There, a leading growth catalyst was Exego's steady expansion to 430 locations in Australia and New Zealand from around 380 when Genuine Parts completed its takeover.
Genuine Parts also has substantial industrial machinery parts and electrical products businesses. These combine for 43% of total revenue, providing a substantial hedge against cyclical downturns in the auto parts division. Between all segments, which also include a small office supply operation, the firm has about 6,000 outlets worldwide.
Together, the non-auto-parts businesses should be capable of mid-single-digit growth, mainly on the strength of the industrial and electrical segments since they, too, operate in fragmented markets undergoing consolidation. As in auto parts, this scenario favors firms with the scale advantages Genuine Parts possesses. Plus, brand recognition in the industrial and electric segments is similar to what NAPA enjoys in the auto parts market.
Along with the ability to consistently limit operating costs to just 22% of revenue, all of this points to the solid future profits and cash flows Genuine Parts needs to keep churning out generous dividends. The current payout of $2.46 a share consumes barely half of free cash flow, so maintaining the past decade's 7% pace of dividend growth shouldn't be a problem.
Risks To Consider: New vehicle sales are currently growing by double digits. If they continue at this pace, product demand could slip for all replacement auto parts suppliers, including Genuine Parts.
Action To Take: Rising new car sales should be a manageable headwind, assuming it does persist. In the United States, the average vehicle age is about 11 years, and analysts see this creeping up to 11.5 years by 2018. They also project a substantial rise in the number of vehicles 12 years and older on the road during that time. Similar conditions exist in Genuine Parts' Australian markets.
I'm confident demand for the firm's core products will remain healthy in the coming years. Combined with the solid growth prospects of other company segments, this makes dividend aristocrat Genuine Parts a compelling buy at current valuations.
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