Company Description: Genuine Parts Co. is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
GPC is trading at a premium to all four valuations above. Since GPC's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 25.0% premium to its calculated fair value of $78.04. GPC did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
GPC earned two Stars in this section for 1.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. GPC earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1948 and has increased its dividend payments for 64 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
GPC earned a Star in this section for its NPV MMA Diff. of $521. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as GPC has. The stock's current yield of 3.24% exceeds the 2.74% estimated 20-year average MMA rate.
Peers: The company's peer group includes: Advance Auto Parts Inc. (AAP) with a 0.6% yield, AutoZone Inc. (AZO) with a 0.0% yield and W.W. Grainger, Inc. (GWW) with a 1.5% yield.
Conclusion: GPC did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks GPC as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $98.91 before GPC's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 64 years of consecutive dividend increases. At that price the stock would yield 3.2%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 3.5%. This dividend growth rate is below the 3.7% used in this analysis, thus providing a tiny margin of safety. GPC has a risk rating of 1.75 which classifies it as a Medium risk stock.
GPC’s long string of dividend increases are supported by its strong underlying fundamentals of sales, earnings and free cash flow. From an operating standpoint, GPC has an extensive distribution network and it has built a loyal customer following over the years. The company maintains wide-ranging inventories and efficiently delivers products in minimal time. Long-term prospects for the company's auto parts segment should improve with the rising number and increasing complexity of vehicles, along with a higher medium vehicle age.
The company has strong financials, stable earnings and an above-average dividend yield for its industry. GPC is one of my larger holdings, with much of its value coming through capital appreciation. With a Free Cash Flow Payout of 34% (down from 55%) and a Debt to Total Capital of 55% (same as previous) its dividend is not only sustainable, but has room to grow. It is currently trading at a 25.0% premium to my calculated fair value of $78.04. I will continue to look for opportunities to moderately add to my position, as my allocation allows.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in GPC (2.6% of my Dividend Growth Portfolio). See a list of all my Dividend Growth Portfolio holdings here.
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Tags: GPC, AAP, AZO, GWW,
