Morningstar | Strong 2Q Has Genuine Parts Poised to Meet Our Long-Term Targets; Shares Fairly Valued
With narrow-moat Genuine Parts reporting second-quarter results that are consistent with our expectations for recovery after a slow start to 2018, we do not anticipate materially altering our $101 fair value estimate. Our long-term forecast, averaging 4% organic annual revenue growth and 8% adjusted operating margins, is also intact.In the first half, the firm posted 18% sales growth and 41 basis points of operating margin deleverage (to 7.5%). Management raised its sales guidance and reaffirmed its earnings per share target for 2018, calling for 13%-14% sales growth (versus 12%-13% earlier) and $5.60-$5.75 adjusted diluted EPS, versus our 13% and $5.77 respective marks (targets include a full year of results for S.P. Richards, which the company plans to combine with Essendant and spin off by year-end, though Essendant has attracted a competing bid from Sycamore Partners).
We expect Genuine Parts' automotive unit (about 65% of pro forma sales) to strengthen and are encouraged that its 2% comparable-store sales mark for the quarter came despite unseasonable U.S. weather that depressed April sales. As the cold winter of 2017-18 and hot summer in the U.S. take their toll on aging vehicle components and lead to failures, we expect the segment's top-line performance to strengthen into the midsingle digits (organically), a level that should allow it to leverage costs and push its margins to slightly more than 10% by the end of our 10-year explicit forecast (from 8% in 2017).
We concur with management that it should be able to pass tariff-related cost increases on to its customers. As shoppers in the do-it-yourself and professional segments are relatively price-insensitive (both cohorts prioritize service levels and speed of delivery over price, in our opinion), we believe Genuine Parts retains more than adequate pricing power to pass on such increases, a view consistent with the brand intangible asset component of our narrow moat rating.
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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