Morningstar | On-Track End to 2018 Leaves Our Outlook Intact for Genuine Parts; Shares Trade Fairly
After year-end results met our forecast, we do not plan to make a large change to our $102 per share valuation for narrow-moat Genuine Parts. Our long-term targets, calling for 4% organic annual revenue growth and 8% adjusted operating margins on average over the next decade should also see little change.Genuine Parts posted $18.7 billion in 2018 sales and $5.68 in adjusted diluted EPS, meeting our marks. Management set its 2019 guidance at 3%-4% sales growth against adjusted diluted EPS of $5.81 to $5.96 excluding currency pressure, behind our 4.6% and $6.05 targets, though leadership's higher depreciation and amortization expense estimate accounts for much of the discrepancy.
The automotive unit (56% of 2018 sales) capped a strong year, posting 4% fourth-quarter comparable sales growth. We expect it to perform well in 2019, particularly in the U.S., where a solid economy, moderate fuel prices, and an increasing number of vehicles in retailers' sweet spot (cars and trucks aged roughly 6 to 11 years old) should propel sales. As it did in late 2018, we expect Genuine Parts to successfully pass any impact from inflation on to customers, capitalizing on motorists' relative price insensitivity. As it capitalizes on its global purchasing scale, we anticipate segment adjusted operating margin to rise to around 10% over the decade ahead, from 8.1% in 2018.
Sales in the industrial group (34% of 2018 sales) were also robust, with 7% fourth-quarter comparable growth and 9% total segment revenue expansion. We expect some normalization in 2019 (into the midsingle digits from a total revenue growth standpoint), reflecting increasing economic uncertainty and clients' pulling forward some investments into 2018 after U.S. tax reform. Still, we view Genuine Parts' skew toward mission-critical parts favorably, as it provides a high standard of service and availability to clients that depend on the components it stocks to keep production lines and other facilities running.
Genuine Parts is engaged in the distribution of automotive replacement parts, industrial parts, and business products. The company's reportable business segments are: Automotive, which distributes automotive parts and accessory items and provides inventory, cataloging, marketing, training and other programs to the automotive aftermarket; Industrial, which distributes industrial replacement parts and related supplies such as bearings, mechanical and electrical power transmission products, industrial automation, and hose, among others; and Business Products, which is engaged in the wholesale distribution of a line of office and other business-related products through a customer base of resellers.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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