Genuine Parts Company (NYSE:GPC) stock seems to be trading at a discounted valuation, signaling upside potential from its current levels. The automotive replacement parts company has seen its stock decline by 9% over the past year, marking a wide underperformance versus the S&P 500 Index (SPX), which has gained by about 25% over the same period. Interestingly, Genuine Parts is set to post record profits this year, which, combined with its underwhelming share price performance, has resulted in a highly compelling valuation.
Given its Dividend King status, this is a rare situation. Thus, I am bullish on GPC stock.
Genuine Parts’ Discounted Valuation Offers a Unique Opportunity
Shares of Genuine Parts rarely trade at a discounted valuation. Thus, one can interpret the recent share price underperformance and discounted valuation as a notable buying opportunity. Such a circumstance is rare because the company is a distinguished member of both the elite group of Dividend Aristocrats—stocks that have increased their dividends for 25+ years and are part of the S&P 500—and Dividend Kings, which have increased dividends for 50+ years regardless of index inclusion.
In fact, boasting 68 years of consecutive annual dividend increases, no other company has reached a lengthier dividend growth track record globally other than American States Water (NYSE:AWR), with 69 years. Also, despite such a mature dividend growth track record, the pace of dividend growth has been maintained at attractive levels. To elaborate, its five-year and 10-year dividend per share (DPS) compound annual growth rates (CAGR) stand at 5.6% and 5.7%, suggesting no slowdown as time goes by.
Such an impressive history of dividend growth, which implies an equally amazing earnings growth track record, has historically led investors to pay a premium for the stock. This makes total sense, as Genuine Parts has navigated numerous recessions and economic downturns over nearly seven decades, emerging stronger each time. Therefore, you can see why the recent share price underperformance disrupts this narrative, presenting a compelling opportunity for investors.
FY2024: Setting the Stage for Record Earnings
Genuine Parts stock presents a compelling opportunity at its current levels, not only due to its recent underperformance but because it has done so despite having set the stage for record earnings this year.
Specifically, Genuine Parts entered Fiscal 2024 on a high note. While sales rose by just 0.3% to $5.8 billion in Q1, this was still its best first quarter ever sales-wise. Moreover, the company was able to increase its profit margins in both the Automotive and Industrial segments, with rises of 10 and 70 basis points, respectively. Therefore, even though sales were more or less flat, adjusted earnings per share (EPS) rose by 3.7% to $2.22, as you can see below.
More importantly, management expects that growth will pick up throughout the rest of the year. In the post-earnings call, they mentioned that renewal rates for corporate accounts, which represent about 45% of the business, remain at historically high levels. Thus, they anticipate sales for the year to grow between 3% and 5% and adjusted EPS to land between $9.80 and $9.95. At the midpoint ($9.88), this figure implies a year-over-year increase of about 6% from FY2023’s $9.33 and another all-time adjusted profit.
A Look at the Valuation
To address Genuine Parts’ discounted valuation, which I’ve mentioned throughout this article, let’s utilize the guidance of the midpoint of management. At the current share price, it implies a P/E of 14.4x. Based on Wall Street’s estimates, this multiple falls further to 14.1x on a 12-month forward basis.
These multiples are on the very low end of the stock’s historical valuation range, with its forward P/E bouncing between 13.5x and 22.0x over the past 15 years (excluding the very brief COVID-19 flash crash in Q1-2020). In my view, this signals a buying opportunity, with the valuation likely to bounce back higher at some point in the coming quarters, especially if interest rates actually see a cut.
Is GPC Stock a Buy, According to Analysts?
Checking Wall Street’s view on the stock, Genuine Parts has a Moderate Buy consensus rating based on three Buys and three Holds assigned in the past three months. At $170.80, the average GPC stock price target suggests 19.6% upside potential.
The Takeaway
Overall, Genuine Parts’ recent share price underperformance and earnings outlook mix form a compelling investment case. As a Dividend Aristocrat and a Dividend King boasting an unparalleled track record of dividend growth spanning 68 years, Genuine Parts’ valuation is likely to see an expansion closer to its historical mean at some point in the future. This combination of valuation expansion potential and a sustained EPS growth story should translate to attractive returns for investors, hence my bullish view of the stock.
