Genuine Parts Company (GPC), incorporated in 1928, engages in the distribution of automotive replacement parts, industrial replacement parts, office products and electrical/electronic materials. The Company has four segments: Automotive Parts Group; Industrial Parts Group; Office Products Group, and Electrical/Electronic Materials Group. (Source: SEC 10-K)
Genuine Parts is one of the oldest members of the dividend aristocrats, with 55 consecutive years of increasing dividends.
Vital Statistics (Source: Google Finance)
- Recent Price: $62.27 (as of 02/24/2012)
- 52-Week Range: $46.10 - $66.43
- Market Capitalization: $9.69 B
- Shares outstanding: 155.65 M
- P/E: 17.39
- EPS: $3.58
- Dividend Yield: 3.18%
A 10-year summary of Sales, Earnings per share (EPS), yearly high and low stock price, corresponding high and low P/E (calculated by dividing the high and low price by the EPS for the year), and average P/E (average of high and low P/E) is shown below.
Key 10-year data for Genuine Parts
Sales (in Billions)
EBIT (in Billions)
Source: MSN Money; SEC-10Ks.
From these data, we can plot Sales, EBIT, and EPS versus Year, as shown in the chart below.
Sales (in Billions), EBIT (in Billions) and EPS versus Year for Genuine Parts, 2002-2011
As evident from the chart above, GPC has demonstrated reasonably predictable sales and earnings over the past 10 years, allowing us to predict EPS in the near future, say in five years (i.e. Year 2016), using the logarithmic regression equation for EPS = 9.495E-46 * exp(0.05215*2016) = 4.33296. This projection assumes 5 percent annual EPS growth.
A conservative average P/E estimate for the stock can be obtained as follows:
Signature P/E: A well established stock has a signature P/E, an average P/E it commands in the market based on its business. We calculate this by averaging the Average P/E over the past 10 years, excluding any outliers (data points that fall significantly beyond the other data points). GPC's stock price has grown remarkably in line with EPS with no P/E outliers, so we average the Average P/Es from the past 10 years to arrive at a signature P/E of 15.4.
High P/E estimate: a conservative high P/E estimate can be calculated by averaging the five lowest High P/Es of the 10 High P/Es from the past 10 years. Averaging the 5 lowest High P/Es from the past 10 years gives 16.5.
Low P/E estimate: a conservative low P/E estimate can be calculated by averaging the five lowest Low P/Es of the 10 High P/Es from the past 10 years. Averaging the 5 lowest Low P/Es from the past 10 years gives 12.3.
Average P/E estimate: this takes the average of the High P/E estimate and the Low P/E estimate, as calculated above, to give a conservative estimate of an average P/E for the stock we can expect. Averaging 16.5 and 12.3 gives us 14.38.
Multiplying our EPS projection for 5 years hence by the average P/E estimate gives us a projected average price for the stock: $4.33296 * 14.38 = $62.31, which represents zero stock price return from the current price = $62.27. When we add in the 3.2 percent dividend yield, however, the total return expected is 3.2 percent a year.
Given a beta = 0.78 for GPC, a risk-free rate = 2 percent (using the yield on 10-year Treasury bond as a benchmark), and estimated risk premium of about 7 percent for the general stock market, we have a discount rate = 2% + 0.78*(7%) = 7.46%. Applying this discount rate of 7.46%, our projected price of $62.31 in 5 years translates to a target price = $43.48 in today's dollars. This is about 30 percent below the current price of $62.27, suggesting the stock is overvalued right now. For a good margin of safety, investors are well advised to buy only if the current price is at least 20% below the target price, which means a buy price at $35 or less.
Current P/E Compared with Signature P/E
The stock's current P/E should be compared with its signature P/E, since established stocks tend to revert back to their respective signature P/Es over the long term. The current P/E of 17.39 is about 113 percent of the stock's signature P/E of 15.4, suggesting the stock is overvalued right now. To provide some margin for error, we should look to buy when the current P/E is 80% or less of the stock's signature P/E, which means a buy price around $44.
Genuine Parts' P/E Compared with Competitors' P/Es
It is helpful also to compare Genuine Parts's valuations with those of its competitors. Current P/E and Forward P/E are tabulated below for the company and its competitors.
Genuine Parts (GPC)
Advance Auto Parts (AAP)
O'Reilly Automotive (ORLY)
Applied Industrial Technologies (AIT)
Sources: Yahoo Finance; Morningstar; MSN Money.
Genuine Parts trades at a slight discount compared to the average current and forward P/E of its competitors. Advanced Auto Parts trades at lower P/Es, while most of the other companies are richly priced right now.
Historically, for the past 10 years, Genuine Parts has significantly underperformed all its competitors listed above, although it outperformed the S&P 500 (of which Genuine Parts is a part).
Lastly, we calculate the Risk Index, calculated as (Current Price - Forecast Low Price)/ (Potential High Price - Forecast Low Price) to give an estimate of the risk: reward ratio. Risk index less than 20% is desired, which gives us +200% potential returns for every risk of 50% loss we assume.
The Forecast Low Price is calculated by multiplying the Low P/E estimate by the Forecast Low EPS, to give a conservative estimate of low price for the stock in 5 years, assuming zero EPS growth and low valuation. Forecast Low EPS is estimated by averaging the EPS over the past 5 years. For growth stocks with predictable earnings growth, EPS in 5 years should not be any lower than this conservative estimate. For GPC, the forecast low EPS is equal to 2.996, so the Forecast Low Price = 12.3 * 2.996 = $36.74.
The Potential High Price is calculated by multiplying the High P/E estimate by the projected EPS in 5 years, giving us a price target in 5 years, should the stock command a high P/E. For GPC, this equals 16.5 * 4.33296 = $71.50.
Thus, the Risk Index = ($62.27 - $36.74) / ($71.50 - $36.74) = 73 percent. Since this exceeds 20 percent, the stock has an unfavorable reward to risk ratio at the current price. A pullback to $43 or below would provide a favorable risk index below 20 percent.
Some risk factors to consider: foreign currency exchange rates of the Canadian dollar and the Mexican peso, prices of commodities such as copper, rising gas prices, and the economy in general.
Genuine Parts Company, currently selling around $62.27, has a target price = $44. While GPC has generated consistent returns over many years, is fairly priced compared to its peers, and should do moderately well over the next year or two as the economy improves, the stock's current P/E of 17.39 is too high compared to its historic P/E, and its risk index is unfavorable at the current price, which assumes a growth rate higher than warranted, considering the cyclical nature of the business. Therefore, I rate the stock a HOLD at the current price. A pullback to $43 or less would provide a more favorable risk to reward ratio to buy.
Disclaimer: Use this information as a starting point for your own due diligence, before buying any stock. If you do buy, be sure to read any annual reports (10-K) and quarterly reports (10-Q) to ensure that the fundamentals remain good and the stock is on target to reach its projected price. After holding for five years, repeat the analysis detailed in the article to decide whether to continue to hold, add, or reduce your position.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.