Joel Greenblatt (Trades, Portfolio) reported increasing his stake in one of Gotham Asset Management’s holdings, Genuine Parts Co (GPC, Financial), a $13.75 billion market cap company that is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products. With the transaction, Greenblatt’s position increased by 10335% to 282,470 shares valued at $26.3 million.
Genuine Parts’ shares gained 2.8% of their market value in a year-to-date basis but lost 12.56% in the first quarter of 2015.Â
Business Model
The company operates several dealers that are intermediaries in the automotive sector (e.g. NAPA), industry (Motion Industries), office (SP Richards) and electricity (EIS). These companies generate most of their sales. Genuine Parts is aiming to achieve low-cost production and reducing time between processes. I think that the automotive demand is going to increase due to the actual scenario of lower interest rates, improved credit availability and economic expansion.
Apart from the business model, there exists some risk that Genuine Parts could be limited to growth if competitors continue to gain market share in end markets. We should remember that the firm competes in a market characterized by vertical integration, where companies are managing to obtain good returns.
Management Team
With respect to the management, we can say that decisions have been efficient, generating operating improvements. Further, acquisitions over the past years were focused to expand in markets and regions. As an example, the acquisition of Exego has opened up growth opportunities in Australia, a new market where the firm can achieve sustainable growth in the long term.
We like the company´s philosophy of returning capital to shareholders in the form of dividends increases and share repurchases. Genuine Parts has an attractive dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 2.62%, which is quite good to protect the purchasing power, especially considering the consistency of track-record dividends payments and favorable expectations regarding dividend growth.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 19.17x, trading at a discount compared to an average of 21.4x for the industry. To use another metric, its price-to-book ratio of 4.31x indicates a premium versus the industry average of 1.77x while the price-to-sales ratio of 0.9x is above the industry average of 0.69x. I must highlight that the P/E Ratio is close to 2-year low of 17.27.
Final Comment
In the U.S. automotive segment, the company operates under the NAPA brand, which covers a broad range of aftermarket products, generating about 90% of its sales. This segment consists of more than 60 distribution centers that supply more than 400,000 parts. The firm´s scale give good bargaining power over suppliers, negotiating lower acquisition costs.
Hedge fund gurus like Mario Gabelli (Trades, Portfolio) and Jim Simons (Trades, Portfolio) also have positions in the stock. Mario Gabelli (Trades, Portfolio) is a major shareholder of the company, with a position in Genuine Parts to $241.6 million, according to the fund's latest filing. Also, formidable investor Jim Simons (Trades, Portfolio) bet on this stock with the stake representing $36.4 million.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
