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Diversified Production and Smart Acquisitions Are the Keys for Success
Posted by: Damian Illia (IP Logged)
Date: April 11, 2014 10:35AM
It is widely known that being able to diversify the production of a company to reach various markets can bring enormous profits. This is the case of Genuine Parts Company (GPC), a diversified giant which reported a revenue of $14.1 billion in 2013. The firm has four operating segments: the Automotive Parts segment, the Industrial Parts segment, the Office Products segment and the Electrical/Electronic segment.
The Automotive Parts segment operates through its National Automotive Parts Association (NAPA) and was responsible for 53% of 2013 sales. Motion Industries, one of the company´s subsidiaries, is responsible for the Industrial Parts segment which generated 31% of last year´s sales. Moreover, The Office Products segment contributed 12% of 2013 sales operates through the subsidiary called S.P. Richards Company. Finally, the Electrical/Electronic Materials segment is run by EIS Inc., and constituted 4% of 2013 total sales. Let´s find out why this multi-billion dollar giant is a great investment opportunity.
New Acquisitions Will Ensure Profits in the Short and Long Term
GPC has made intelligent acquisitions during 2012, 2013 and the first months of 2014, which are expected to generate revenues in the short term and ensure growth for the coming five years. In 2012 the firm completed the acquisition of Quaker City Motor Parts, adding 270 NAPA stores to the network. In addition, with the GPC Asia Pacific (Exego Group) acquisition, invested capital showed to be very profitable, as both acquisitions contributed 15% of 2013 revenue.
Moreover, the acquisitions of AST Bearings LLC and Paragon Service & Supply in 2013 should provide annual revenues of around $50 million. And, the acquisition of Commercial Solutions Inc. in January 2014 is expected to generate annual revenues around the $100 million mark.
Genuine Parts has also recently expanded the Electrical/Electronic segment through acquisitions. The acquired businesses are Tekra Corporation in 2013, and Electro-Wire Inc. and Garland C. Norris Company in February 2014. These acquisitions should ensure annual revenues of about $210 million.
The Perks of Being a Big Company
The company has to deal with big competitors in the Automotive Parts Segment, such as LKQ Corporation (LKQ) and O´Reilly Automotive Inc. (ORLY). However, GPC managed to generate a narrow economic moat in both the Automotive Parts and the Industrial Parts Segment. It's narrow economic moat stems from its intangible assets and cost advantages, provided by the conglomerate’s enormous size. Moreover, the company's ROIC ratio is expected to be around 13% in the coming years, ensuring lofty returns.
GPC´s subsidiary Motion Industries is one of the main sectores which benefits from the company´s size. The Industrial Parts Segment also has a big distribution network, enabling the firm to achieve cost advantages over its competitors, and rapid delivery of products to its customers.
A Promising Outlook for the Coming Years
Even though the stock is currently trading at a price premium, GPC is definitely a great company to invest in. As shown in the following chart, the firm boasts a rising revenue stream, along with a moderate upward tendency in net income. This moderate tendency in net income can be explained by the company´s recent acquisitions, which have put a strain on free cash flow.
Furthermore, the company´s ROE rate of 20.45% sure is tempting for someone who is looking for a good investment opportunity. I feel very bullish about this stock as the 13.60% EPS growth rate strongly indicates that shareholders are profiting from GPC’s good financial performance and smart acquisitions. In addition, investment gurus such as Joel Greenblatt (Trades, Portfolio) have also seen a great investment opportunity in this company, supporting my bullish stance towards GPC.
Disclosure: Damian Illia holds no position in any stocks mentioned.
Stocks Discussed: GPC, LKQ, ORLY,