General Parts Company (GPC), which is the parent company of Napa Auto Parts, reported earnings on Tuesday that exceeded analysts’ estimate for the fiscal fourth quarter 2009. Analysts expected the company to report EPS of $.51 on sales of $2.4 billion, but the actual results outpaced estimates on both counts, with EPS of $.62 and revenue of $2.47 billion. The stock rose by more than 6% following the results, but according to our methodology value investors have missed the boat on this stock.
General Parts’ largest division is auto parts, but it is also diversified into supplying office products, and industrial and electric parts, as well. In the last quarter, the results were really carried by the auto division as sales rose 6% in that division, and all others showed declines. The industrial and electric divisions actually were down by double digits from a year ago but, thanks to auto parts sales, slumped by only 2% overall. Even with those slumping sales in mind, the company said that it saw “early signs” of improving conditions in all of its divisions in the second half of the year, which it says may bode well for 2010. The company backed up that optimistic outlook by increasing its quarterly dividend to $.41 from $.40, which represents the 54th consecutive year that it has increased its dividend payout.
While we can appreciate that business is picking up in the company's most important division, we recently downgraded GPC to our neutral Fairly Valued rating from Undervalued because of recent price appreciation. Both price-to-sales and price-to-cash earnings multiples were trading below their historically normal ranges as recently as two weeks ago, but after today’s advance both are within their normal ranges. For the stock to reach the midpoint of our valuation ranges (established through historical studies) would imply a price of $42 per share, which the stock did hit as of the day’s highs. Unless GPC can begin to show sales growth in the coming quarters, we think the current valuation is justified where it stands.
To be clear, we are not advising selling or shorting these shares. Rather, the entry point for value investors has passed. With that said, if the company can continue to improve fundamentally or the stock declines in price again, we will have to reevaluate our stance on Genuine Parts Co.