Genuine Parts Company (GPC) had a very stable 2016, as its share price almost continuously moved in a $90-100 trading range. The company is now trading at the lower end of that range, but does this make it appealing from a fundamental point of view?
Decent results in 2016 fueled share buybacks
After posting slightly lower revenue in 2015, Genuine Parts was able to show an increase in its top line again. Not much, just 0.3%, but that was sufficient to bring the total revenue to $15.34B, whilst the gross profit increased by in excess of 1% to $4.6B. Unfortunately GPC wasn’t able to keep all of its operating expenses under control, as the SG&A expenses reached the highest level in several years, resulting in a 5% lower pre-tax income.
Fortunately the average tax rate was also lower (36% versus 37.2% in 2015), which reduced the impact on the net income. The verdict? A net income of $687M, or 2.6% lower compared to 2015. Fortunately Genuine Parts is also a fan of buying back stock, which resulted in the company’s EPS decreasing by just 1%, to $4.61. This means that despite seeing its net income decrease for the third year in a row now, GPC is able to keep its EPS relatively stable, thanks to the continuous share repurchases.
Source: SEC filings
It’s usually also a good idea to have a look at the cash flow statements, as these might show a different result due to for instance a higher/lower capex versus depreciation charges and share based payments.
Genuine Parts reported an operating cash flow of $946M, but after deducting the changes in the company’s working capital position and the deferred taxes (even though you’re able to ‘defer’ taxes, they will usually still have to be paid), the adjusted operating cash flow is approximately $828M. The total capex was $161M in FY 2016 (which is definitely higher than the previous few years, and it will very likely stay at the current level).
Source: SEC filings
This resulted in a free cash flow of approximately $670M, which is in line with the net income. Genuine Parts used this cash quite prudent. It spent less than $387M on dividends and repurchased a net amount of approximately 1.7 million shares for $181M. This means that despite the $670M incoming cash flow, only $570M was used to reward its shareholders, a move we can applaud.
The net debt increased, but remains low
The remainder of the free cash flow was used to fund GPC’s continuous hunger for acquisitions. In 2016, it paid $462M for no less than 19 new acquisitions. Eleven of these purchases were added to the Automotive Parts Group, five companies were added to the Industrial Group whilst the Office Products and Electrical Division were able to welcome respectively two and one new acquisition.
As these acquisitions were completed throughout the year, the total impact on the revenue was relatively limited to $350M, but this amount should be boosted in the current financial year. When GPC acquired the nineteen companies, they had combined annualized revenue of $617M, so you should expect a 3-4% revenue increase in 2017 on the back of these acquisitions being included for the very first entire year.
Source: company presentation
And whilst GPC financed the purchases with fresh debt, the company’s balance sheet remains very robust. With a net debt of just $632M, the net debt/EBITDA ratio is super low at less than 0.5. Even if you’d add the ‘other liabilities’ and ‘post-retirement liabilities’ to the net debt, the ratio remains below 1.1-1.15.
So assuming Genuine Parts wants to keep its net debt/EBITDA ratio below 2.25, this paves the way for an additional $1.5B in potential acquisitions – as we think GPC still has some companies on its shopping list. Two more acquisitions have already been announced, but there will be more in the pipeline.
Genuine Parts doesn’t do anything extraordinary, as its management team is just continuing to grow the business whilst keeping the shareholders’ interests in mind. For 2017, the dividend has been increased by 3% to $2.70 per year, in quarterly installments. This is the 61st consecutive year GPC has increased its dividend, which emphasizes its shareholder friendliness.
With a free cash flow yield of approximately 5%, Genuine Parts definitely isn’t too expensive right now, as 2017 will be another year of growth.
Disclosure: the author has no position in Genuine Parts Company.