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With two weeks left in its first quarter, it appears Genuine Parts (GPC) is once again positioned to exceed Wall Street earnings expectations. The recent pull back in the stock has now pushed the dividend yield back up to 3.5%. Given this and what I believe will be a strong report for 1Q, this appears to be an opportune time to add to positions.

I have written frequently about Genuine Parts before, including a prediction last quarter for stronger than expected earnings which played out. For first quarter 2011, the First Call analyst consensus EPS forecast is currently $0.75, but I think it will be closer to $0.80.

Genuine Parts is a conglomerate distributor with four divisions: aftermarket auto parts (NAPA), industrial parts, office supplies and electrical components and materials. The last division is a relatively minor part of GPC at under 5% of sales. The key to earnings in 1Q is a relatively flat office supply division, still robust NAPA division and a strong industrial business.

The NAPA auto parts division is a quasi distributor-retailer that distributes parts to franchises but also operates about 1,000 corporate stores. This is the company's biggest division, making up about 50% of sales and profits. While other auto parts retailers have talked about January being a weak month because of winter storms, I believe business picked up again in February with the warm weather and carried into March. Outside of fluctuations related to weather, the auto aftermarket has been on a tear over the last several quarters as the number of new vehicle sales remain low and consumers have been holding on longer to their older vehicles. So while revenue growth may be a bit weaker than the 9% seen in 4Q, I don't think it will be below the company's annual guidance of 6%-8%. Margins should also be up after a relatively easy comparison last year in 1Q.

GPC's industrial distribution division, which represents just under a third of its sales, has tended to track on a unit basis closely with the Industrial Production statistic published by the Federal Reserve. With today's update, industrial production is tracking up slightly on a sequential basis from the fourth quarter of last year. The important manufacturing and mining are actually doing quite a bit better, but the average is being dragged down by utilities due to warm weather in February.

Based on the Industrial Production Index and reports from other industry participants that GPC's adjusted sales tend to track [WW Grainger (GWW)] I believe GPC's industrial division is poised to report sales growth in the high teens, or well above the company's annual guidance of 8%-10%.

The office supplies should see a decent quarter. After sales turned positive in 4Q after eight consecutive quarters of declining sales, I believe sales will be closer to flatish in 1Q. Demand appears to be recovering along with hiring the last few months, but price increases on some products as of 1/1/11 likely pulled some sales forward from 1Q into 4Q. Margins, however, should be up modestly, continuing the 4Q trend, albeit with less of an increase.

Finally, with $530 million in cash at the end of 2010 and perhaps $150 million in free cash flow after the dividend coming in this year, GPC has the resources to start buying back stock on the recent pullback. I don't think the company would have been overly aggressive, but $35-$70 million could add about $0.01-$0.02 to 1Q and annual EPS.

Source: Genuine Parts: Earnings Will Again Top Expectations