EUR 850.00 For Business Accounts Only

Morningstar | Despite a Slow Start to 2019 in Europe, Our Long-Term Targets for Genuine Parts Remain Intact

While a slow first quarter for its European automotive unit and currency headwinds should lead us to temper our 2019 expectations, we anticipate an offsetting time value of money-related adjustment will keep our valuation for narrow-moat Genuine Parts near its current $103 per share mark. As the soft results in Europe appear to be attributable mostly to transitory (weather-related) factors, our long-term targets for the firm, calling for 4% organic annual revenue growth and 7% adjusted operating margins, on average over the next decade, should also see little change.

Genuine Parts posted $4.7 billion in first-quarter sales and a 6.8% operating margin. Management reaffirmed its 2019 guidance, calling for 3%-4% sales growth against adjusted diluted EPS of $5.75 to $5.90 (or 4%-5% and $5.81 to $5.96 excluding currency pressure), behind our 4.9% and $6.04 pre-announcement targets.

The automotive unit (56% of 2018 sales) saw 2% sales growth against just under 40 basis points of operating margin deleverage (to 6.8%), versus our 4% and flat respective full-year targets. Although a softer European economy and upheaval from Brexit contributed, management cited weather in the region as the main culprit, with a mild winter curbing demand. While the company’s experience with the European market is relatively recent (coming after it acquired Alliance Auto Parts in 2018), warm winters were the primary factor behind the automotive parts industry’s 2017 slowdown in the United States. We anticipate a similar trajectory, with the unit likely to remain sluggish throughout 2019 (the strain of cold weather accelerates part failures) before recovery should the following winter prove more typical. Still, Genuine Parts should benefit from low-single-digit inflation, which we are encouraged (though not surprised) that it has been able to pass on to customers. In all, we do not plan to materially alter our long-term segment forecast (4% sales growth, 9% average operating margin).

The industrial and business products segments posted solid results (up 6% and 1%, for units that accounted for 34% and 10% of 2018 sales, respectively). We continue to believe the industrial unit can post mid-single-digit long-term growth as Genuine Parts capitalizes on its high standard of service, while near-flat results are likely to remain the norm in business products amid unfavorable market dynamics.