General Parts’ largest division is auto parts, but they are also diversified into supplying office products, industrial and electric parts as well. In the last quarter, the results were really carried by the auto division as sales rose 6% in that division, and all others showed declines. The industrial and electric divisions actually were down by double digits from a year ago, but thanks to auto parts sales slumped by only 2% overall. Even with those slumping sales in mind, the company said that they saw “early signs” of improving conditions in all of their divisions in the second half of the year, which it says may bode well for 2010. The company backed up that optimistic outlook by increasing their quarterly dividend to $.41 from $.40, which represents the 54th consecutive year that they have increased their dividend payout.
While we can appreciate that business is picking up in their most important division, we recently downgraded GPC to our neutral Fairly Valued rating from Undervalued because of recent price appreciation. Both price-to-sales and price-to-cash earnings multiples were trading below their historically normal ranges as recently as two weeks ago, but after today’s advance both are within their normal ranges. For the stock to reach the midpoint of our valuation ranges (established through historical studies) would imply a price of $42 per share, which the stock did hit as of the day’s highs. Unless GPC can begin to show sales growth in the coming quarters, we think the current valuation is justified where it stands.
To be clear, we are not advising selling or shorting these shares, rather the entry point for value investors has passed. With that said, if the company can continue to improve fundamentally or the stock declines in price again, we will have to reevaluate our stance on Genuine Parts Co.
Ockham Research Staff