Is Genuine Parts Company A Genuine Value Stock?

Genuine Parts Company $GPC is a stock that provides a compelling combination of cyclical growth and defensive stability. The recent results were impressive and it is a stock which is a prospect worthy of equity research reports. What makes GPC attractive is that as, a distributor with diversified end markets, it has the ability to decrease working capital in a downturn.

Furthermore, its largest division (Automotive) has the potential to do well in a recession. Although passenger miles do go down in a slowdown, the average age of a car tends to go up as consumers hold off purchases. And older cars need more spare parts. It is an industry trend that has benefitted the likes of pure automotive stock plays Autozone $AZO and O’Reilly Automotive $ORLY.

Genuine Parts Company

However, Genuine Parts Co is a stock that is about a lot more than automotive parts distribution. They also have a cyclical industrial division and small electronics & electrical division (EIS). In addition there is an office products distribution business which has diminished in importance to the GPC over the years.  To demonstrate the evolving nature of turnover and profitability, here is a breakdown of the last five years for Q3…

Division Profits (k)	Q3 2007	Q3 2008	Q3 2009	Q3 2010	Q3 2011
Automotive	115,023	111,730	107,735	124,059	141,233
Industrial	69,669	77,220	36,495	72,856	97,191
Office	33,183	33,426	26,692	26,657	27,024
EIS	7,685	10,272	6,802	8,393	11,138
Total	225,560	232,648	177,724	231,965	276,766

Now clearly, the automotive division is a lot less cyclical than Industrial whilst the office products division is stuck in a rut due to the ongoing rationalization of employment and ultimately office fit outs. However, the key to understanding this business is how Genuine Parts Company is capable of reducing working capital requirements in the face of a recession. This results in favorable free cash flow generation potential over the course of the cycle…

	2007	2008	2009	2010	To Q3 2011
Net Income	506,339	475,417	399,575	475,511	430,159
Depreciation & Amortization	87,702	86,698	90,411	89,332	66,938
Change in op assets & liabilities	47,430	(33,806)	355,312	110,055	(311)
Op Cash Flow	641,471	530,309	845,298	678,663	497,408
Capital Expenditures	(115,648)	(105,026)	(142,259)	(85,379)	(63,932)
Free Cash Flow	525,823	425,283	703,039	593,284	433,476

…and at the Q3 results presentation, the management said this with regards cash flow generation for the full year 2011…

'While our several consecutive years of strong cash flow, we expect to generate strong cash flows for the full year and continue to estimate cash from operations of approximately $700 million for the year. At this level, free cash flow after deducting capital expenditures and dividends should be more than $300 million, which is in line with last year. We are pleased with the continued strength of our cash flows and remain committed to our ongoing priorities for the use of the cash.'

In other words with capex forecast at $105m this means 2011 free cash flow is likely to be at $595m.


Genuine Parts Company Evaluation

Now looking at the current stock price of $57.52 this equates to a market cap of $8,980m and an EV of $8950m. The last five years of free cash flow (across a difficult cycle)  average at around $568m which would GPC on a 5 year FCF/EV margin of 6.3% and this is pretty good value, especially as analysts are predicting 10% EPS growth for 2012. However, there are concerns. Most of the cash flow growth has come from cost savings, inventory reductions and greater working capital management. There is a limit to how far this can go.

Furthermore, net income has not really gone up in the last five years and industrial sales tend to fall off a cliff when the economy gets bad.  For example, in 2008 Industrial sales were growing at yearly rate of near 7% until Q3 then suddenly they fell to 0% in Q4 and then -16.4% in the first quarter of 2009.  It is worth noting how late in the year this drop off occurred. This suggests that the Industrial division tends to be a bit late cycle, so the strength we are seeing now could fall quite sharply if the economy worsens.

Frankly, I think it is better to hold a pure play like Autozone AZO or O’Reilly Automotive ORLY and then balance them with other more cyclical stocks than make an outright purchase of GPC right now.

Fastenal Confirms US Construction Acitivity is Solid

Fastenal $FAST gave earnings and demonstrated good growth. The Fastenal story is a good one and stock investors can find a detailed write up and earnings analysis of the company’s fundamental evaluation in the link at the bottom. However, for now the important thing to takeaway from Fastenal’s earnings report is that-if the US was in isolation- a double dip recession looks unlikely. Fastenal is a good company to look at because it sells the kinds of fasteners and hardware equipment that are used in construction activity.

The best way to conclude this from the results is to look at the sales figures for stores that have been open for more than five years. These stores tend to be more cyclical in their revenues because they are more mature in their market share within their local markets. Here are the numbers for revenue growth…

	Jan.	Feb.	Mar.	Apr.	May	June	July	Aug.	Sept.	Oct.	Nov.	Dec.
2011	15.3%	17.9%	19.2%	19.1%	17.9%	18.2%	17.3%	15.2%	14.5%
2010	-2.1%	-0.5%	7.4%	14.9%	17.3%	16.2%	19.8%	18.2%	18.9%	17.9%	13.2%	16.0%
2009	-12.4%	-14.3%	-21.5%	-25.2%	-25.2%	-26.3%	-26.6%	-24.7%	-24.2%	-21.7%	-15.0%	-12.1%

…and it is clear that US construction activity hasn’t fallen off a cliff just yet!

Further Reading

http://earningsview.blogspot.com/2011/01/fastenal-set-for-good-growth-but-what.html

Alcoa Kicks off Earnings Season With Weakness

Alcoa $AA gave results and its always interesting to look at them and do some equity research analysis because it is a bellwether for the upcoming US earnings season. Alcoa is also a key cyclical stock that gave good forward guidance as to where the economy is headed. No need to dwell too long on the earnings because most investors will know that they missed –already reduced- analyst EPS forecasts. Alcoa reported 15c in EPS against a forecast of 22c. The commentary on the conference call also confirmed the weakness in the global economy and, interestingly, seemed to confirm that this mainly caused by corporation holding back expenditure in the face of macro economic uncertainty.

Alcoa Earnings

 The macro issues will be put aside for the moment, but for now, it’s useful to look at what was said about Alcoa’s end markets. The following table is derived from the presentation and indicates year-on-year growth by semester and region. The regional split is not available for aerospace and industrial gas turbines.

	N America	Europe	China	Global
Aerospace				-4%     12%
Automotive	4%       0%	14%       -16%	2 %        2%	-4%        4%
Heavy Truck Trailer	28%    23%	14%       -11%	5%     -24%	10%     -14%
Beverage Can	0%     -2 to -3%	6%         2-3%	10-15%  15-20%	2-3%    2-3%
Commercial Cons	-9%    -3 to -4%	-4%     -2 to -4%	10-12%	1-3%
Industrial Gas Turbine				5-10%

So what are the key takeaways and conclusions from Alcoa’s earning report?

• Europe is weak across the board and this is a consequence of macro economic uncertainty
• Aerospace looks strong going forward as commercial jet deliveries are forecast to grow at 9% CAGR until 2014
• European automotive looks like it is falling off a cliff but global growth is accelerating thanks to China automotive sector
• Industrial turbine growth remains solid
• Beverage looks attractive because global growth looks solid and their appears to be a structural story in China as the consumer shifts to using cans

Given these factors, any stock that is a user of aluminum and has it as a major part of its fixed costs could see margin expansion and increased profitability if their end markets hold up. So for example, beverage can manufacturers like Rexam, Crown Holdings $CCK or Ball Corp $BLL could do well. Rexam tends to hedge a lot so it might not be the best stock to play this theme but the other two are worth a look provided their emerging market exposure is good. Similarly, aerospace manufacturers and suppliers to Boeing and Airbus could also see margin expansion.

Of course, all of this is predicated on continued weakness in aluminum prices…

…and given slowing global growth, this could be a safe assumption. The one area of circumspection in Alcoa’s report related to China and commercial construction. If the likes of Jim Chanos are right in their bearish predictions of a major slowdown in China’s residential and commercial construction market then things could get nasty for Alcoa.

Alcoa Reports Slowing Growth in Europe

Another key conclusion from this report is how badly Europe is faring. This will particularly affect Germany because it is heavily exposed to heavy machinery Capex. Indeed, the Dax has performed very badly this year and, it is safe to conclude that a satisfactory resolution to the Euro zone debt crisis is very much in their interest.

As the Alcoa CEO, Klaus Kleinfeld said in the conference call..

I guess that's all the time we have today. Let me sum it up. I mean, we've seen strength in many of our markets despite the sharp slowdown in Europe that hurt our sequential results. And I'm, as I just said, more concerned about the lack of confidence than about market fundamentals. It almost looks like the world is worrying itself into another recession and that should not be allowed to happen.
I think the problems that we have today, I mean, around Europe and some of the discussions here, I think are all problems that can be solved. And I hope the solutions get accelerated and we'll be able to restore confidence. Confidence, I said many times, is the air, the oxygen that every economy needs to grow.

…it really is all about returning confidence to the markets.

Source:

Alcoa Earnings Presentation