Genuine Parts: Earnings Preview

| About: Genuine Parts (GPC)

Genuine Parts Company (NYSE:GPC) announced that it would release its results for the third quarter of 2011 before the market opens on October 18, 2011.

Atlanta, Georgia-based Genuine Parts realized earnings per share of 96 cents in the second quarter, which was wider than the Zacks Consensus Estimate of 89 cents. In the upcoming quarter, the Zacks Consensus Estimate for Genuine Parts is pegged at a profit of 95 cents per share, reflecting an annualized growth of 14.06%. There is no upside potential for the current estimate.

With respect to earnings surprises, the company outdid the Zacks Consensus Estimate in the trailing four quarters. This is reflected in the average earnings surprise of 7.37%, implying that the company has beaten the Zacks Consensus Estimate in each of the last four quarters.

Second Quarter Recap

Genuine Parts reported a 22% rise in profit to $151.8 million in the second quarter of 2011 from $124.5 million in the year-ago quarter. Earnings per share in the reported quarter were 96 cents, up 23% from 78 cents delivered in the comparable quarter last year. Quarterly EPS also surpassed the Zacks Consensus Estimate by 7 cents.

Total sales in the quarter grew 12% to $3.18 billion, exceeding the Zacks Consensus Estimate of $3.12 billion, driven by improvements across all its businesses and favorable conditions in the aftermarket. Operating profit also increased 18% to $264.6 million, despite a rise in selling, general and administrative expenses (SG&A). SG&A increased 9% to $651.6 million during the quarter.

Sales in the Automotive Parts segment grew 9% to $1.59 billion, the Industrial Parts segment rose 19% to $1.05 billion, the Office Products Group expanded 4% to $418.0 million and the Electrical segment soared 28% to $136.8 million.

Genuine Parts had cash and cash equivalents of $516.7 million as of June 30, 2011 compared with $411.9 million in the corresponding period a year ago. Long-term debt reduced to $250 million at the end of the reported quarter versus $500 million in the prior-year quarter.

During the first six months of 2011, Genuine Parts’ net cash flow from operations declined to $250 million from $352.5 million in the prior-year quarter, despite higher profit. This was primarily attributable to an increase in excess tax benefits from share-based compensation. Meanwhile, capital expenditures increased to $27.2 million from $18.1 million in the second quarter of 2010.

Estimate Revisions Trend

Earnings estimate for the third quarter of 2011 is currently pegged at a profit of 95 cents per share. The analysts are confident about the company given its various initiatives and strong balance sheet.

Agreement of Estimate Revisions

Out of the 6 analysts covering the stock for the third quarter, none has either upgraded or downgraded the stock in the past 30 days.

Magnitude of Estimate Revisions

Following the first quarter earnings release in July, third quarter earnings per share were projected at 94 cents. However, over the last 7 days, the earnings estimate has increased to and remained at 95 cents.

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 can hamper its margins going forward.

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