Genuine Parts: Stable But Lacks Organic Growth (NYSE:GPC)

Real Components Firm (NYSE:GPC) sells alternative elements within the automotive trade. The corporate has achieved good development lately, however as the corporate’s development appears to be maintained solely by frequent acquisitions as a substitute of natural development, I imagine traders ought to keep cautious. The present valuation appears to replicate fairly minimal development, according to my expectations. For these causes, I’ve a hold-rating for the inventory.

The Firm

Real Components Firm sells alternative elements within the automotive trade in addition to for industrial clients. The corporate was based in 1928 and has scaled its operations organically and thru acquisitions right into a globally acknowledged firm, it has operations in North America, Europe, Asia, and Australia.

Real Components Firm has been listed on the inventory marketplace for a really very long time. Within the inventory’s final 30 years, the inventory has appreciated by 656%, translating to a compounded annual fee of round 7.0% – whereas the inventory has generated a very good return, it hasn’t been a big outperformer.

On prime of the share appreciation, traders get quarterly dividends of $0.95, making the inventory’s dividend yield round 2.47%. The dividend has a very good historical past of development, as dividends had been solely $0.13 again in 1989:

Apart from dividends, the corporate appears to make use of its free money move in acquisitions – the corporate’s annual spend on money acquisitions appears to be within the tons of of tens of millions in most years. Within the newest years, for instance, the half distributor purchased Alliance Automotive Group in 2023 and Lausan Group in 2022.

Financials

As the corporate has spent vital assets on acquisitions, Real Components Firm has achieved a compounded annual development fee of round 5.0% from 2002 to 2022:

The corporate has a income development steerage of 4% to six% for 2023, fueled by the beforehand talked about acquisitions.

All through the corporate’s historical past, Real Components Firm has saved a steady working margin – from 2002 to 2022, the margin has fluctuated between 5.92% and eight.06%:

Including to the steadiness, Real Components Firm’s revenues don’t appear to have very massive fluctuations – in the course of the 2008 monetary disaster, whereas many different corporations had a really arduous time, Real Components Firm’s revenues solely declined by 8.7% in 2009. The corporate’s working revenue fell by 16.1% – the quantity appears fairly wholesome in comparison with many different corporations within the 12 months.

The corporate has outlined monetary targets for 2025 – the targets embrace revenues of $26.5 billion to $27 billion for the 12 months, in addition to an EPS of $11 to $11.5. The center level of the income steerage would characterize an annual development fee of 6.6% from 2022 to 2025 – whereas the expansion fee could be solely barely above the historic fee, I imagine Real Components Firm can solely obtain the expansion with aggressive acquisitions.

Real Components Firm’s steadiness sheet appears comparatively wholesome to my eye. The corporate has $530 million in money. On the opposite aspect, the corporate has round $3403 million in long-term debt – as Real Components Firm’s market capitalization is over $21 billion, I see the quantity as wholesome. Of the debt, $418 million is in present parts and the remainder in non-current parts; I imagine the present portion might be simply paid off with the corporate’s free money move.

Valuation

Not removed from a historic stage, Real Components Firm at the moment trades at a ahead price-to-earnings ratio of round 16:

The valuation appears to be modestly costly for my part, as the corporate has low natural development. To place the valuation right into a extra thorough perspective, I constructed a reduced money move mannequin.

Within the mannequin, I count on to hit its development steerage of 4% to six%, as I count on a development of 5.5%. After 2023, I count on a nominal development of two % for yearly after – though the expectation is under Real Components Firm’s 2025 steerage, I don’t see it as affordable to cost in development that I don’t see as occurring organically; acquisitions eat away money flows, which aren’t factored within the mannequin both.

As for the corporate’s EBIT margin, I count on that the corporate retains up its 2022 stage of seven.6% indefinitely – I don’t see any present components that might point out a long-term margin that varies from the present stage. Real Components Firm has additionally saved a principally steady margin all through its historical past; I don’t imagine the margin ought to see massive variance sooner or later, both.

These expectations, and a weighted common value of capital of 8.59%, craft the next DCF mannequin state of affairs with an estimated truthful worth of $119.43, round 22% under the present worth:

The used value of capital is derived from a capital asset pricing mannequin with the next assumptions:

In Q2, the corporate had $16.5 million in curiosity bills. Annualized, this comes as much as an rate of interest of round 1.94% – the corporate appears to pay an extremely low rate of interest on its money owed. The corporate has fairly reasonable quantities of debt; I estimate the corporate’s long-term debt-to-equity ratio to be 15%.

I take advantage of america’ 10-year bond yield of 4.17% because the risk-free fee. The estimated fairness danger premium of 5.91% is taken from Aswath Damodaran’s newest report. Tikr estimates Real Components Firm’s beta to be 0.91; the beta isn’t very excessive, as alternative elements are principally a necessity. Lastly, I add a small liquidity premium of 0.3% into the price of fairness, placing the price of fairness at 9.85% and the WACC at 8.59%, used within the DCF mannequin.

Takeaway

Though the DCF mannequin suggests some draw back for Real Components Firm’s inventory, I don’t imagine a sell-rating is justified. The corporate has very steady earnings, that I imagine will not be represented fully by the beta of 0.91 – the beta may very nicely be decrease sooner or later, reducing the price of capital. Additionally, the DCF mannequin doesn’t keep in mind any acquisitions – as the corporate may create shareholder worth by acquisitions, the DCF mannequin may underestimate the inventory’s potential. As such, I’ve a hold-rating for the inventory.