Genuine Parts: Earnings Preview

| About: Genuine Parts (GPC)

Genuine Parts Company (NYSE:GPC) is scheduled to release its second quarter 2011 results before the market opens on July 15, 2011.

Atlanta, Georgia-based Genuine Parts earned 80 cents per share in the first quarter, which beat the Zacks Consensus Estimate of 76 cents.

For the upcoming quarter, the Zacks Consensus Estimate is pegged at 89 cents per share, which reflects an annualized improvement of 14%.

With respect to earnings surprises, the company beat the Zacks Consensus Estimate in each of the last four quarters, amassing an average earnings surprise of 7.87%.

First Quarter Recap

Sales in the quarter appreciated 14% to $2.97 billion, exceeding the Zacks Consensus Estimate of $2.86 billion, driven by improvements in all its businesses.

However, operating profit ebbed 10% to $656.8 million due to a rise in selling, general and administrative expenses (SG&A). SG&A increased 10% to $634.3 million during the quarter.

Sales in the Automotive Parts segment grew 9% to $1.40 billion, while the Industrial Parts segment rose 24% to $999.8 million, the Office Products Group rose 5% to $432.7 million and the Electrical segment soared 39% to $139.8 million.

Genuine Parts had cash and cash equivalents of $465.9 million as of March 31, 2011, an increase from $333.5 million in the year-ago period. Long-term debt remained unchanged at $500 million as of that date. Consequently, the company’s long-term debt to capitalization ratio fell marginally to 14.8% from 15.7% in the corresponding period a year ago.

In the quarter, Genuine Parts’ net cash flow from operations declined significantly to $53.4 million from $139.6 million in the prior-year, despite an improvement in profit. This was primarily due to a significant decline in excess tax benefits from share-based compensation and unfavorable changes in operating assets and liabilities. Meanwhile, capital expenditures increased to $14.5 million from $9.9 million in the first quarter of 2010.

Estimate Revisions Trend

The Zacks Consensus Estimate for the second quarter of fiscal 2011 is currently pegged at 89 cents per share. Analysts are confident about the company given its various initiatives and strong balance sheet position.

Agreement of Estimate Revisions

Out of the 7 analysts covering the stock for the second quarter of fiscal 2011, none have either upgraded or downgraded over the last 30 days.

Our Take

Genuine Parts has undertaken various initiatives to boost sales and earnings, such as product line expansion, penetration into new markets and cost-saving activities. The company relies on a diverse product portfolio for top-line and bottom-line growth.

In the Automotive Parts segment, the company expects growth of 2%–5% per year in the future, with NAPA representing about 10% of the market. Demand should remain strong as the average age of vehicles on the road has risen to almost 10 years.

However, lower consumer confidence is thwarting Genuine Parts' efforts to drive sales growth in its Automotive Parts segment. Moreover, it has been unable to institute meaningful price hikes in its automotive business due to pressure from retailers. These factors can hamper its margins going forward.

Taking into account the above conditions, we have a long-term Neutral recommendation on the stock.

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Tagged: , Auto Parts Wholesale, Earnings
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