EUR 850.00 For Business Accounts Only

Morningstar | After Solid 3Q, Our Outlook Should Not Change Significantly for Genuine Parts

With third-quarter results for narrow-moat Genuine Parts containing few surprises, we do not anticipate significantly altering our $103 fair value estimate. Our long-term targets, which contemplate 4% organic annual revenue growth and 8% adjusted operating margins on average through the next 10 years, are intact.

Year to date, Genuine Parts saw 17% sales growth against a 7.6% operating margin. The firm raised its full-year sales growth target by a point to 14%-15% and modified its adjusted diluted earnings per share estimate to $5.60-$5.70 (from $5.60-$5.75, with the high end cut due to freight and payroll costs as well as currency pressure). The revised marks are not far from our 14% and $5.71 preannouncement forecasts.

As we expected, the automotive unit (just under 60% of pro forma sales) strengthened as favorable weather conditions, progress in do-it-yourself initiatives, and diminishing fleet composition headwinds lifted results. The firm's 3.2% U.S. automotive comparable-store sales growth was its best quarterly result since early 2016, and we expect strengthening as cars and trucks from stronger new-vehicle sales years since 2010-11 age into retailers' sweet spot. European operations should also propel growth as Genuine Parts builds in growth markets and delivers a higher standard of service than subscale rivals. We continue to expect mid-single-digit long-term growth against gradual segment operating margin expansion to 10% from 8% in fiscal 2017.

The industrial unit (about a third of pro forma sales) was similarly strong, posting 8% sales growth thus far in fiscal 2018 (near our preannouncement 7% full-year target). However, the segment has not been immune to wage and freight pressure, with its operating margin up only around 10 basis points (to 7.5%) despite the sales growth. As the cost environment normalizes, we expect operating leverage to build gradually, lifting the segment's margin to around 8.5% by the end of our explicit forecast.

With the demise of its planned combination with Essendant, we expect the business products unit (around 10% of pro forma sales) to continue to struggle to generate meaningful revenue and margin expansion. Still, we do not anticipate the group will provide anything but a fairly minor distraction for management from its far more advantaged automotive and industrial units. We would not be surprised if Genuine Parts continued to seek strategic alternatives for a business that should struggle to generate more than low-single-digit revenue growth and mid-single-digit operating margins for the foreseeable future.