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OEM Parts Company Stock: Wait for a Better Entry Point


Authentic parts (New York Stock Exchange: GPC) has outperformed the broader market by an impressive margin this year. Granted, while the S&P 500 has plunged 22% this year, OEMs have rebounded 14%. The striking outperformance of the original parts results from its resilience recessions and high inflation, as the company has shown itself able to pass on increased costs to its customers. Its immunity to the perfect storm created by 40-year high inflation and the growing risk of an impending recession may entice some investors to buy this high-quality Dividend King. However, as the stock has been trading at a high price-to-earnings ratio for almost 10 years of 19.8investors should wait for a better entry point.

Company presentation

Genuine Parts distributes spare parts for all types of vehicles, including electric vehicles, as well as industrial parts and materials. It is present in more than 3,000 locations in North America, Europe, Australia and New Zealand.

Due to the unprecedented fiscal stimulus packages offered by most governments in response to the pandemic and the ongoing war in Ukraine, inflation has soared to a 40-year high this year. As a result, most companies have experienced a sharp increase in costs and as a result have seen their profit margins shrink significantly. Even rock-solid retailers such as Walmart (WMT) and Target (TGT) have suffered sharp margin contractions this year. Declining profit margins for most companies is a major reason for the current bear market in the S&P 500.

Genuine Parts is a shining exception, as it has proven to be able to pass on increased costs to its customers. During the last quarter, the company increased its revenue by 17% over the prior year quarter thanks to comparable sales growth of 11.5% and growth of 8.8% thanks to acquisitions, partly offset by foreign exchange losses. In other words, the auto parts retailer has shown itself to be immune to the drastic consumer fiscal tightening that has resulted from the surge in inflation.

In addition, Genuine Parts increased its profit margin from 9.2% to 9.8%, and thus increased its earnings per share by 26% over the prior year quarter, from $1.74 to $2. $.20, beating the analyst consensus of $0.17. The company posted record revenue and earnings per share in the second quarter. Additionally, this was the ninth consecutive quarter in which OEM parts significantly exceeded analysts’ estimates. This testifies to the solidity of the company’s economic model and its sustained commercial momentum.

Even better, despite the sharp slowdown in the global economy, Genuine Parts raised its forecast for the full year. It raised its revenue growth outlook from 10%-12% to 12%-14%, driven mainly by strong momentum in industrial parts, and improved its earnings per share growth outlook by 11%- 14% to 13%-15. %. Notably, management improved its outlook despite its expectation of larger currency losses (3.0% vs. 1.5%-2.0% previously).

Genuine Parts’ sustained business performance should be attributed to its strong execution, but also to some industry tailwinds. There is a continuous increase in the total number of kilometers traveled and the average age of vehicles. New car inventory is also tight due to unprecedented supply chain disruptions, so used car prices have risen significantly. All of these factors have led to more frequent replacement of aftermarket parts and as a result they provide a strong tailwind to the original parts business.

Investors should also note that Genuine Parts has posted a consistent growth record throughout the past decade. The company has grown its adjusted earnings per share in 8 of the past 10 years, at an average annual rate of 6.8%. A significant portion of this growth has come from a long series of small business acquisitions. Management recently said it continues to explore a healthy pipeline of potential acquisitions.

Overall, it is reasonable to expect that Genuine Parts will continue to grow earnings per share by around 7% per year on average in the coming years. Analysts agree with that view, as they expect the auto parts retailer to grow earnings per share by 7% annually in 2023-24.


Genuine Parts has outperformed the broader market by an impressive margin over the past 12 months. During this period, the stock rebounded 27% while the S&P 500 lost 14%. As a result, Genuine Parts has reached new all-time highs and is currently trading at a nearly 10-year high price-to-earnings ratio of 19.8. This earnings multiple is above the stock’s 10-year average of 18.2.

More importantly, the stock has traded with an average price-to-earnings ratio of 18.2 for a decade with depressed interest rates. Now that interest rates are at 15-year highs, most stocks have suffered a compression in their valuation levels as the present value of their future cash flows has declined significantly. To sum up, the market has already appreciated the virtues of genuine parts, which have proven to be exceptionally resilient in the highly inflationary environment currently prevailing.

On the other hand, Genuine Parts is currently trading at 17.3 times its expected earnings in 2024. In other words, as long as the company remains on its reliable growth trajectory, its growth will gradually offset the headwind of valuation. current share premium. . Overall, stock parts seem to be fairly valued right now.


Genuine Parts has increased its dividend for 66 consecutive years, so it’s a Dividend King. There are only 45 Dividend Kings in the investment universe and therefore the achievement of the original coins is outstanding. Additionally, the company has a healthy payout ratio of 45% and a strong balance sheet, with interest expense consuming only 4% of operating profit. Additionally, its net debt (according to Buffett, net debt = total liabilities – cash – receivables) currently stands at $9.8 billion. This amount is only 45% of the stock’s market capitalization and 9 times its annual earnings, and therefore it is certainly manageable. With all of these facts and its reliable growth trajectory, Genuine Parts should continue to increase its dividend for many years to come.

Genuine Parts has increased its dividend by an average of 6.1% per year over the past decade and by an average of 5.5% per year over the past five years. As the company is expected to increase its earnings per share by around 7% per year in the coming years, it should continue to increase its dividend by 5% to 6% per year.

On the other hand, due to its rally, the stock currently offers a low 10-year dividend yield of 2.3%.

Dividend yield of GPC shares
Data by YCharts

Therefore, it is not attractive from an income perspective, especially given the current inflation rate of 8%. The low 10-year dividend yield may also be a signal that investors should wait for a more opportune entry point.

Final Thoughts

Genuine Parts has provided a safe haven for its shareholders in the current bear market as the stock has proven immune to the inflationary environment that has prevailed this year. However, the investment community has already appreciated the resilience of this high-quality Dividend King and has rewarded the stock with a 27% rally in the past 12 months, to a new all-time high.

Given the nearly 10-year high valuation level and the stock’s low 10-year dividend yield, investors should wait for a better entry point, likely around the $140 technical support. On the other hand, in the long term, the steady growth of the original parts should more than offset the headwind of its current valuation.