GPC: Double Digit Returns Through 2017

Jan.16.14 | About: Genuine Parts (GPC)

Genuine Parts Company (NYSE:GPC) offers a nice yield at 2.6%, has an excellent track record of increasing the dividend over the past 57 years, and has recently started to increase its dividend at a high single / low double digits rate making it a great addition to a diversified dividend growth portfolio.

I. COMPANY OVERVIEW

Genuine Parts is a service organization engaged in the distribution of automotive replacement parts, industrial replacement parts, office products and electrical/electronic materials. Products and services are offered through a network of over 2,000 operations, geographically located across the United States, Canada and Mexico.

II. HISTORICAL PERFORMANCE

2008 2009 2010 2011 2012
Revenue $11,015.3 $10,057.5 $11,207.6 $12,458.9 $13,013.9
% Growth n/a -8.7% 11.4% 11.2% 4.5%
Gross Profit 3,272.5 3,009.8 3,252.9 3,606.0 3,778.1
% Margin 29.7% 29.9% 29.0% 28.9% 29.0%
EBITDA 888.8 761.4 875.7 998.4 1,121.6
% Margin 8.1% 7.6% 7.8% 8.0% 8.6%
Net Income 475.4 399.6 475.5 565.1 648.0
Avg Diluted Shares 163.0 159.7 158.5 157.7 156.4
% Growth n/a -2.0% -0.8% -0.5% -0.8%
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Note: All figures are MM's (except per share data) unless noted otherwise

Genuine Parts has performed well over the past five years. The Company's revenue contracted only once at a rate of 8.7% in 2009. In spite of the one year contraction, the Company managed a positive compounded annual growth rate of 4.3% over the past four years. The gross margin has trended slightly negative, staying within a tight 1% range over the past five years (bottoming at 28.9% and peaking at 29.9%). On the other hand, EBTIDA Margins have expanded from 8.1% in 2008 to 8.6% in 2012; resulting in EBITDA expansion from $889MM in 2008 to $1,122MM in 2012 (26% expansion) over the five year period. All in all, nice growth with stable margins.

Per Share Data
2008 2009 2010 2011 2012
Revenue $67.58 $62.97 $70.73 $79.02 $83.20
% Growth n/a -6.8% 12.3% 11.7% 5.3%
Gross Profit 20.08 18.85 20.53 22.87 24.15
EBITDA 5.45 4.77 5.53 6.33 7.17
Net Income 2.92 2.50 3.00 3.58 4.14
Dividends 1.56 1.60 1.64 1.80 1.98
Payout Ratio 53.5% 64.0% 54.7% 50.2% 47.8%
Dividend Growth n/a 2.6% 2.5% 9.8% 10.0%
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Note: Per share data based on weighted average diluted shares outstanding.

On a per share basis, we need to view the Company wide historical performance in a different light. The Company has changed its weighted average shares outstanding through share redemption (net of issuance) from 163MM to 156MM over the five year period (a 4.0% decrease) resulting in a more favorable performance on a per share basis. EBITDA per share has expanded from $5.45 to $7.17 (a 31% increase as compared to a 26% increase at the Company level). The Company's dividends per share have been growing, increasing from $1.56 per share in 2008 to $1.98 per share in 2012 (a 27% increase or a 6.1% compounded annual growth rate), while the payout ratio has decreased from 53% to 48%.

III. CAPITALIZATION

Market / Par Value EBITDA Multiple
- Cash and Equivalents $321 0.3x
+ Total Debt $834 0.7x
+ Market Capitalization $12,881 10.6x
Total Enterprise Value $13,404 11.0x
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Note 1: Based on TTM EBITDA of $1,217MM as of 9/30/13.

Note 2: Market Cap based on 154.4MM shares outstanding and a $83.45 market price as of 1/15/14.

Genuine Parts has an under leveraged (and over equitized) capital structure. The Company is levered at 0.7x TTM EBITDA (0.4x net of cash), with a total enterprise value of 11.0x TTM EBITDA. Ideally, the Company would incur a little bit of low cost debt to leverage their equity returns. Even with moderate leverage, the Company would have a low cost of debt and maintain significant financial flexibility while enhancing returns to the equity holders. I think it's also important to note the contraction in sales (and EBITDA) was relatively modest in 2009 and even with the proposed increase in leverage, the capital structure would have been very manageable throughout the last recession.

IV. PROJECTIONS

2013 2014 2015 2016 2017
EBITDA $1,227.8 $1,323.2 $1,410.8 $1,540.0 $1,660.0
% Growth 9.5% 7.8% 6.6% 9.2% 7.8%
Interest Expense 24.0 24.0 24.0 24.0 24.0
Taxes 372.4 402.0 429.1 469.2 506.4
Capital Expenditures 115.5 124.4 132.7 144.8 156.1
Dividends 331.9 331.9 331.9 331.9 331.9
Addl' FCF $384.0 $440.9 $493.1 $570.1 $641.6
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Note: All figures are MM's (except per share data) unless noted otherwise. Consensus Estimates only relate to EBITDA projections. All other assumptions are based on unadjusted LTM actuals.

The consensus estimates for Genuine Parts are on the boarder of moderate to aggressive, projecting a growth rate between 9.5% and 6.6% annually through 2017 at the EBITDA line. Under the consensus case the Company is projected to have significant additional free cash flow available to reinvest in the business, repurchase shares (always assumed for modeling purposes), or increase the dividend.

2013 2014 2015 2016 2017
Addl' FCF $384.0 $440.9 $493.1 $570.1 $641.6
Share Redemption Price $95.97 $110.36 $126.92 $145.95 $167.85
Shares Redeemed 4.0 4.0 3.9 3.9 3.8
Wtd Avg Diluted Shares 152.4 148.4 144.5 140.6 136.8
Dividends Per Share $2.18 $2.24 $2.30 $2.36 $2.43
Dividend Growth 10.0% 2.7% 2.7% 2.8% 2.8%
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The share redemptions are assumed to be at a 15% annually compounded price. I believe that this is structured very conservatively. If the weighted average redemption price exceeded this threshold, the investor would have ample opportunity and time to re-evaluate their position and consider selling their position for a gain from today's price. The Company's share redemption would allow for a 3% increase in the dividend annually from the share redemptions alone. Additionally, the Company's payout ratio would decline as the dollar amount of dividends paid would not be increasing while the Company's earnings (using EBITDA as a proxy) would be increasing.

If the Company performs in line with the consensus estimates and pay dividends / redeems shares as outlined above, the Company would achieve the IRR / Cash on Cash returns illustrated below based on the outlined terminal EBITDA multiples.

Returns Based on Terminal EBITDA Multiple
8.5x 9.0x 9.5x 10.0x 10.5x 11.0x
IRR 6.5% 8.1% 9.6% 11.0% 12.4% 14.2%
Cash on Cash 1.27x 1.35x 1.42x 1.49x 1.56x 1.67x
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V. RECOMMENDATION

Genuine Parts currently offers an attractive investment opportunity if the Company can hit the consensus estimates. The dividend yield of 2.6% exceeds the S&P 500's (NYSEARCA:SPY) yield by about 80 basis points and management maintains a health attitude towards growing the dividend and expanding EBITDA. Over the next five years, the Company has great chance to provide a double digit returns.

Disclosure: I am long GPC, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.