GPC Misses Street EPS Estimate

Genuine Parts Company reported earnings per share of $1.17, $0.04 less than the Street consensus but $0.09 better than year-ago EPS. The Street was expecting better performance from Genuine Parts’ office products and electrical wholesale operations. With the automotive group performing well and our expectation that the industrial and electrical/electronic (EIS) groups should improve as the year progresses, plus the accretion from the Exego acquisition, analysts remain comfortable with our full-year EPS estimate of $4.30 (adjusted for a special one-time gain).

However, this medium-uncertainty-rated stock is trading at a 1.26 times premium to the $65 fair value estimate, putting the market value into 2-star territory. On the conference call, management lowered 2013 full-year guidance for consolidated revenue growth to 9%-10%; it had previously said 10%. Management raised the low end of its EPS guidance–which contains a $0.22 mark-to-market gain on the already-owned 30% share of Exego–taking the range up to $4.50-$4.60 from $4.45-$4.60. On April 1 GPC completed the acquisition of the remaining 70% stake of Exego that it did not already own.

Automotive group revenue showed an increase of 6% versus the second quarter of 2012 excluding the Exego acquisition and 22% including Exego sales. Management remains confident in its full-year automotive guidance of 5%-7% organic revenue growth and an 18%-22% increase including Exego.

Historically, the company has been able to pass along price increases to customers but has also refused a price increase from its vendors when management believes customers would not accept the price hike. Industrial group revenue declined 0.6%, EIS dropped 4.3%, and office product revenue decreased 2.7% from the yearago period. Consolidated operating margin was slightly off at 7.0% versus 7.3% in 2012.

We remain more cautious in our full-year revenue forecast for these business groups, forecasting industrial to be up 1%, office products down 1%, and EIS to be flat. Our revenue forecast is at the low end of management guidance for 2013. The automotive group, the largest of GPC’s segments, reported a solid 9.3% operating margin, the same as the second quarter of 2012. Industrial and EIS were down by 0.4 and 0.2 percentage point to 7.4% and 8.5%, respectively. However, office products, which has long been under pressure from the megastore customers in this segment, reported a flat margin of 7.4%.

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