We continue modeling share prices for selected companies from the S&P 500 index and here we (first time) address the stock price model for Genuine Parts (GPC) which is a company from services sector which "distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials". The model has been obtained using our concept of share pricing as a decomposition of a share price into a weighted sum of two consumer price indices. The intuition is simple; a faster growth in the CPI related to GPC (e.g. motor vehicle maintenance and repair) relative to some independent but dynamic reference (e.g. prescription drugs) should be manifested in a higher pricing power for the studied company. Hence, our stock price model seeks for a defining CPI and the best reference which we both take from a set of 92 different (not seasonally adjusted) CPIs. This set includes the headline and core CPI, all major categories from food to other goods and services, and many minor subcategories with long enough history (i.e. continuous estimates should be available since 2000).
We have borrowed the time series of monthly closing prices of GPC from Yahoo.com (February 2012 is included) and the CPI estimates through January 2012 are published by the BLS. The evolution of GPC share price is defined by the consumer price of the index of motor vehicle maintenance and repair (MVR) and the index of prescription drugs (PDRUG). The defining time lags are as follows: the MVR index has a one month lead and the PDRUG index leads by 9 months. The relevant best-fit model for GPC(t) is as follows:
GPC(t) = -1.87 MVR(t-1) + 0.65PDRUG(t-9) + 9.86(t-1990) + 42.72, February 2012
where GPC(t) is the GPC share price in U.S. dollars, t is calendar time. Figure 1 displays the evolution of both defining indices since 2002. The PDRUG index has a positve slope and grows much faster than the MVR one, Therefoer, the PDRUS index drives the rise in the share price since 2009.
Figure 2 depicts the high and low monthly prices for an GPC share together with the predicted and measured monthly closing prices (adjusted for dividends and splits). The predicted prices are well within the bounds of the share price uncertainty. The model residual error is shown in Figure 3 with the standard deviation between July 2003 and January 2012 of $1.74.
Since all prices related to medical goods and services are on a healthy rise without any sign of deceleration, the GPC price should not be decreasing unless the MVR index starts to grow fast. Fortunately for GPC, there are no real forces to pull the MVR index up. Hence, we expect GPC to rise further in 2012.
Figure 1. The evolution of the index of Motor vehicle repair and maintenance (MVR) and the index of prescription drugs (PDRUG).
Figure 2. Observed and predicted monthly closing prices for a GPC share.
Figure 3. The model residual error: stdev=$1.74
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.