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Rash Menaria
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Here are a couple of my original ideas: Small Cap Tech Rediff (REDF): Recommended buy at less than $2 in August 2010. Within 1.5 months of my recommendation it touched $6. It is currently trading at $9.39. http://seekingalpha.com/article/220090-rediff-com-finally-sees-some-growth-catalysts... More
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  • Genuine Parts Company: Is market significantly underestimating 2Q earnings? 0 comments
    Jun 13, 2010 5:05 PM | about stocks: ORLY, AAP, AZO, GPC, MSM, FAST, GWW, AIT, USTR
    Company Background:
     
    GPC is a $6.48 bn mkt cap distributor of automotive replacement parts, industrial replacement parts, office products and electrical/electronic materials.
     
    Segments
    % of revenues
    Competitors/Peers
    Automotive replacement parts
    52
    Advance Auto Parts, Inc.(NYSE:AAP); O'Reilly Automotive, Inc.(NASDAQ:ORLY); AutoZone, Inc (NYSE:AZO)
    Industrial replacement parts
    29
    Applied Industrial Technologies (NYSE:AIT) and to lesser extent Fastenal (NASDAQ:FAST), MSC Direct (NYSE:MSM). Grainger (NYSE:GWW)
    Electrical/electronics materials
    3
    Office products
    16
    United Stationers (NASDAQ:USTR)
     
    What is that market under estimating?
     
    I believe market is significantly underestimating sales for 2Q 2010. Sales for 1Q2010 increased 6.4% YoY. Sell side consensus (and most of buy side) are simply extrapolating it and to arrive at 6.8% sales growth for 2Q2010. I believe they are missing the fact that trends became significantly better from March onwards:
     
    • March Daily Sales were up 11% YoY while Jan and Feb were up low single digits. So, if March trend continues; 2Q2010 would be much better vs. 1Q2010.
    • GPC Management mentioned at the time of its earnings call that April was going as strong as March and my checks suggest that May didn't weaken either.
    • Further auto replacement part companies (AAP, AZO) whose quarter ends after March 31 have reported significant sales pick up from March onwards continuing
    • For Industrial replacement parts segment PMI is a good indicator which has remained above 50 (signaling expansion) during current European debt crisis. Further daily sales numbers reported by companies FAST (up 21.1% in May and 18.6% in April) and GWW (up 16% in April and May) are encouraging.
    • Also comparisons for GPC are easier in 2Q as compared to 1Q (2Q2009 total revenues was down 11.78% while 1Q2009 was down 10.78%) 
     
    What is the bear argument and why is it flawed?
     
    Bears are saying that since 1Q2010 sales increase for GPC’s automotive parts business was 5.8% as compared with 7.7% increase by AAP, 7.1% increase by AZO and 6.9% increase by ORLY; hence, GPC is loosing market share and sales trends for GPC might not be as encouraging as its peers going forward.
    Table below shows the relative sales performance of GPC vs. its peers from 2006 onwards.
     
    AAP SSS
    AZO SSS
    ORLY SSS
    Auto parts group avg. ex-GPC
    GPC automotive sales
    1Q06
    3.9%
    2.1%
    3.8%
    2.5%
    5.0%
    2Q06
    1.2
    -0.9
    3.5
    0.3
    5.2
    3Q06
    1.4
    0.3
    3.6
    0.9
    1.2
    4Q06
    1.6
    -0.3
    2.1
    0.6
    2.4
     
     
     
     
     
     
    1Q07
    1.1%
    0.4%
    6.8%
    1.5%
    2.7%
    2Q07
    1.2
    -0.2
    2
    0.1
    2.4
    3Q07
    1.1
    1.3
    4.3
    1.2
    2.6
    4Q07
    -0.4
    -0.3
    2.1
    -0.4
    2.0
     
     
     
     
     
     
    1Q08
    0.6%
    -0.3%
    -0.4%
    -0.3%
    3.5%
    2Q08
    2.9
    0.6
    3.4
    1.4
    2.4
    3Q08
    -0.1
    -1.5
    -0.8
    -0.9
    0.9
    4Q08
    3.0
    6.0
    4.0
    4.5
    -6.3
     
     
     
     
     
     
    1Q09
    8.2%
    7.4%
    5.7%
    7.4%
    -6.6%
    2Q09
    4.8
    5.4
    4.8
    5.1
    -4.8
    3Q09
    4.7
    5.6
    5.3
    5.2
    -0.8
    4Q09
    2.4
    1.0
    2.7
    1.9
    5.9
     
     
     
     
     
     
    1Q10
    7.7%
    7.1%
    6.9%
    7.3%
    5.8%
     
    We can see that after performing better than its peers till 3Q2008, GPC started loosing market share to them and trend continued till 3Q2009. However, thanks to management initiatives and efforts trend started reversing from 4Q09.
     
    As is expected, investors biggest fear right now is what if GPC started loosing markets share again? And bears just got a chance to manipulate that fear as GPC posted 5.8% growth in 1Q10 as compared to 7.3% by its peers. Bears are arguing that GPC is loosing market share to other competitors even now. Here is why this argument is flawed:
     
    Automotive repair parts sales picked up significantly from March onwards. Quarter for AAP ends on April 24, 2010 while Quarter for AZO ends on May 8, 2010. Thus their quarterly numbers includes 24 and 38 days of better trends as compared to GPC. So naturally their reported numbers would be better than GPC. Further, March being up 11% for GPC clearly shows that trends at GPC are inline with its peers and exposes the hollowness of market share loss arguments.
     
    (Note: ORLY with significantly large acquisition like CSK is a different story with a lot of other variable; hence let’s skip it for a while.)
     
    GPC would be having full effect of these positive trends in 2Q numbers while in 1Q only March numbers benefited. Hence, growth for GPC’s auto business would be much more in 2Q than 1Q. Other business segments like industrials and electrical also have significantly easier comps in 2Q which would help overall sales growth YoY.
    What Bulls have and what are they missing?
     
    Bulls find recent improvement in automotive replacement parts sales encouraging. With other peers reporting good numbers and having positive commentary despite of recent macro crisis, bulls love this sector.  No European exposure further adds icing to the cake.
     
    However, their estimates are very surprising. Goldman Sachs Analyst who is the most bullish one and has GPC in Conviction Buy list is just a cent ahead of consensus in terms of EPS estimates. His estimate of 5.7% increase in sales for auto parts in 2Q as compared to 5.85% in 1Q definitely does not include significant improvement from March onwards. He is just playing safe by not deviating too much from consensus.
     
    Stock performance:
    Stock has performed worse than its peers declining 7% as compared to auto peers which are up 10-20%, since April 1.
     
    GPC’s decline is actually inline to worse than even some of its industrial MRO peers (AIT,FAST,MSM,GWW) which is surprising given the fact that its Auto parts business is really doing very well.
     
    What to expect:
     
    Sales beat and guidance raise are sure. Given recent out performance of peer group as compared to broader market, stock might easily move up again to $45-46 (from current price of $40.78) going into the earnings. Magnitude of beat is likely to decide how much stock rises above 46. (Please note very carefully auto segment numbers & outlook on earning's call).
     
    Risks Analysis:
    • Haven’t done channel checks for June yet. Would be doing it shortly; mail me if you would like to be updated.
    • Recent underperformance versus auto parts peers has mitigated the risk significantly and skewed risk-reward to more favorable side. If one looks at the numbers out there (particularly for auto parts business) even bulls are very conservative. Further, it’s a very stable business mix with dividend yield over 4% and has good growth prospects (both organic and inorganic).
    Please Note:
     
    If you would like to get more detailed analysis and financial model please email the author.
     
    The Author is a former buy side analyst with excellent and consistent track record of profitability covering multiple sectors. He is currently looking for a job and open to work on a completely performance based pay or on pay per idea basis. If interested in hiring him or want to take a look at more ideas please mail back at rash.menaria@yahoo.com


    Disclosure: No Positions

    Disclosure: No Position
    Themes: retail Stocks: ORLY, AAP, AZO, GPC, MSM, FAST, GWW, AIT, USTR
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