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Genuine Parts Company (GPC)

Founded in 1928, Genuine Parts Company (GPC) is one of the largest replacement part makers in the automotive, industrial, office equipment, and electronics industries.

The company markets its products in the U.S., Canada, Australia, New Zealand, and Mexico through a large network including over 100 North American auto and industrial distribution centers and 6,700 NAPA auto parts stores.
 
Genuine Parts Company’s sales are derived from a diverse group of well-known industry brands including NAPA auto parts, Motion Industries (industrial components), EIS (electrical components), and SP Richards & Company (office products).

The company's most important business segments are its automotive and industrial units, which combine to account for more than 80% of company-wide sales and profits. Business products (12% of sales) and electrical materials (5%) generate the remainder.

By geography, North America represents the company’s dominant market, generating more than 90% of revenue today. However, in order to expand its geographical footprint in Europe, Genuine Parts Company acquired the second largest European automotive parts distributor, Alliance Automotive Group, for $2 billion in late September 2017. 

After the acquisition, Genuine Parts Company's global automotive aftermarket distribution network will increase to 9,100 stores and 130 distribution centers across North America (83% of pro forma revenue), Europe (9%), Australasia (7%), and Mexico (1%).

Business Analysis

Genuine Parts Company has managed to raise its dividend for more than 60 consecutive years, an incredible achievement made possible thanks to two of the company's main competitive advantages: its trusted brand names and massive distribution network. 

The company is a leading distributor to its four primary end markets with #1 or #2 market share positions and an impressive reach in every segment. For example, NAPA auto parts has a total of about 8,300 global stores, serving more than 17,000 global service centers. 

Meanwhile, Motion Industries was founded in 1946 and has a history of providing quality products to industrial firms like Halliburton (HAL), 3M (MMM), and General Electric (GE). In fact, Motion Industries is closely tied into the entire global industrial base, with its components finding their way into roughly 6.9 million products around the world each year.

The second factor contributing to Genuine Parts Company’s moat is its supply chain and breadth of inventory (worth more than $3 billion). This is because NAPA auto parts works in an industry in which inventory management and just-in-time delivery are paramount.

For example, an auto parts store generally doesn’t want to hold a lot of excess inventory because that represents a substantial capital investment. Similarly, auto repair shops generally order components as needed in order to service customers that just showed up in a timely manner.

Genuine Parts Company’s large network of global distribution centers makes it possible for its customers to order parts at a moment’s notice and have them generally delivered the same day, maximizing their inventory turnover, sales, and profits.

As one of the largest players, Genuine Parts Company can afford to hold more inventories and offer better delivery times than many of its competitors.

In addition, the auto parts and industrial components sectors are generally price inelastic, meaning that customers care far more about the reliability of products and the convenience of deliveries than they do about getting the absolute lowest price.

This allows Genuine Parts Company to maintain above average pricing power for its most important product segments, resulting in steady and even improving margins over time thanks to growing economies of scale.

As a result, Genuine Parts Company's sales and profit have increased in 84 and 73 of the 89 years that the company has been in business, respectively. The company’s steady growth, another essential component to its dividend growth thesis, is attributable to several factors. 

First, unlike selling to original equipment manufacturers, the aftermarket business is relatively stable. Vehicles and equipment break down and must be replaced. Therefore, the business is less discretionary. 

Additionally, the automotive aftermarket has been benefitting from the steadily improving reliability of vehicles over the decades, which allows consumers to own cars for longer, but only if they are properly maintained and repaired. As cars age, the cost to repair them increases, generating more demand for GPC.
Source: Genuine Parts Company Investor Presentation

The average fleet age for U.S. cars is now 11.7 years and continues climbing. And with the U.S. population slowly but steadily growing, and with it the number of vehicles on the roads, this creates a large, stable, growing, and highly fragmented industry for Genuine Parts Company to service.
Source: Genuine Parts Company Investor Presentation
In fact, the U.S. automotive aftermarket is a $100+ billion industry, and despite being the largest supplier, Genuine Parts Company ’s market share is less than 10%.

The industry's fragmentation creates the opportunity for growth through acquisition, including large-scale purchases that allow the company to enter new market segments (like Motion Industries), as well as numerous bolt-on acquisitions at its subsidiary level.

In 2017 alone, Genuine Parts Company acquired 14 businesses that are expected to add $2 billion in annual sales, representing a 13% increase in revenue.
Source: Genuine Parts Company Investor Presentation
In addition, the company has a long-term goal of achieving 6% to 8% annual sales growth and 7% to 10% earnings and free cash flow per share growth thanks to its four-pronged strategy focused on acquisitions, organic growth, margin expansion, and steadily reducing its share count through buybacks.
Source: Genuine Parts Company Investor Presentation

In fact, Genuine Parts Company appears to be well situated for many years of steady growth because it has a company-wide market share of less than 6% in four industries with annual global sales in excess of $280 billion.
Source: Genuine Parts Company Investor Presentation

Overall, Genuine Parts Company's businesses seem to operate in slow-changing industries and maintain dominant market share positions because of their extensive distribution networks (just-in-time delivery), leading range of products, brand recognition, and long-standing customer relationships.

Key Risks

While Genuine Parts Company’s impressive growth record points to a highly disciplined and conservative management team, there are nonetheless several risks to keep in mind.

First, Genuine Parts Company has been on a shopping spree. The company has made over 45 acquisitions since 2015, including its recent $2 billion bet on Alliance Automotive Group (AAG). Besides its sheer size, this deal was notable because it shifts more of the company's mix into Europe, a region where GPC has not had much of a presence. 

While AAG appears to have many similarities to Genuine Parts Company, including a similar product mix, acquisitive growth strategy, and leading market share positions, there are no guarantees that the integration process and expected synergies will play out as management hopes. 

For now, management deserves the benefit of the doubt given the company's solid long-term track record of acquisitive growth. However, large-scale international expansion comes with plenty of risks that need to be monitored going forward. 

Genuine Parts Company’s business can also be impacted any given quarter by volatile currency rates (25% of the business is now outside of the U.S.), industrial production trends, and the health of the auto market. 

While the aftermarket business is generally much steadier than the broader economy, the company’s industrial business is less predictable because the industries in which it operates can be highly cyclical, resulting in sales and earnings growth that can be a bit lumpy.

However, none of these factors seem likely to impair the company’s long-term earnings power.

One potential long-term risk is Amazon’s increased push into the market, which could pressure pricing and margins in the future. Fortunately, according to the Reuters article linked to above, the do-it-yourself market targeted by Amazon only accounts for about 25% of Genuine Parts’ sales mix, which is a much lower proportion of total revenue compared to its three larger rivals. 

Additionally, Genuine Parts Company possesses several advantages that seem to further protect its business from Amazon.

NAPA’s extensive distribution network enables it to make rapid deliveries to repair shops (which require very fast turnaround times for customers), the NAPA brand (which accounts for about 90% of Genuine Parts Company's auto aftermarket products) is trusted by shops and consumers, and having a brick-and-mortar location can help customers ensure they are purchasing the right replacement part (i.e. a hands-on shopping experience is helpful given some of the complexities involved in auto parts).

Simply put, it would probably be challenging for even Amazon’s supply chain and logistics network to rival Genuine Parts Company’s given the quick turnaround times demanded by customers and the brand equity Genuine Parts Company has built up over the decades.

Meanwhile, another longer-term risk to keep in mind is that NAPA auto parts specializes in components for traditional, internal-combustion engine (ICE) vehicles.

In the coming decades, electric vehicles could account for a large and fast-growing segment of the global vehicle market. In fact, according to data from Bloomberg, electric vehicles are projected to cost the same as their internal-combustion counterparts by 2022, potentially creating an inflection point for demand.  

The risk for Genuine Parts Company is that electric vehicles are generally more reliable and less maintenance intensive than ICE cars because they have far simpler designs. As a result, cars may last longer and require less aftermarket parts in the future.

Fortunately, this risk doesn’t seem like one that will materially impact the company for many years, if not decades, given the low penetration rate of electric vehicles today.

The rise of driverless cars is another long-term risk and means that a significant number of consumers may subscribe to car-sharing services, in which fleets of electric vehicle robo taxis ferry them wherever they need to go, at a much lower overall cost than individual vehicle ownership.

That, in turn, could result in the world’s total vehicle fleet size declining despite a still growing population. Self-driving vehicles would presumably be far more efficient and less likely to get in accidents as well, perhaps reducing needs for repairs. However, just like with electric vehicles, this risk is likely far off in the future with many uncertainties. 

At the end of the day, the company’s large, highly fragmented, slow-changing markets help mitigate most of these risks.

Closing Thoughts on Genuine Parts Company

Genuine Parts Company generates consistent free cash flow, maintains a conservative balance sheet, operates in a slow-changing industry, sells recession-resistant products, and has grown its dividend for more than 60 consecutive years. 

As a diversified global distributor, the company should continue to benefit from serving a broad range of fragmented markets as well, especially with new growth opportunities presented by its acquisition of Alliance Automotive Group. 

Simply put, it’s hard to find a more reliable dividend grower than GPC. While the company's growth numbers will never dazzle shareholders, slow and steady often wins the race.

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