If you’re considering whether Genuine Parts Company (GPC) is a good stock to buy, you’ll want to evaluate the company’s safety and quality to see if it would make a suitable long-term investment.
While GPC is still growing, it’s technically a mature company.
It’s all too common for mature companies to see lower sales, shrinking margins, decreased efficiency, and even growing debt levels because some mature businesses can’t keep up with an evolving market. This can all add up and wreak havoc on a company’s once-strong core business.
That’s why this article will fully analyze GPC’s financial safety and company quality so you can see if Genuine Parts Company is a good stock to buy today. We’ll cover GPC’s:
- Profitability
- Earnings Quality
- Debt
- Cash Conversion Efficiency
Because these are all crucial to understanding the dependability and caliber of Genuine Parts’s business model.
This article is a bit on the longer side, but if you’re interested in GPC, I’d recommend reading each of the sections so you can better understand the company’s financial position.
Or if you’re pinched for time, feel free to jump around to the sections that you’re most interested in.
How profitable is Genuine Parts?
Profitability is a key indicator of a company’s financial health and ability to generate shareholder returns.
Investors often seek out companies with strong profitability metrics, which indicate a company’s ability to outperform competitors and create value for shareholders.
Money Spent on Merchandise (Gross Margins)
Gross margin measures the percentage of revenue left over after a company pays its cost of goods sold (COGS), which is its materials and service costs directly related to creating and delivering products or services.
Genuine Parts’s main cost of goods sold item is the cost of its merchandise that it sells, but also includes costs for inbound freight from suppliers.
Gross margin is important for investors to track because it helps to show whether customers are willing to pay a premium to what it costs the business. By extension – a company with high gross margins probably has good products.
Additionally, investors can examine gross margin trends over time to determine whether the business has the pricing power to combat cost inflation and keep gross margins high.
Genuine Parts has seen high gross margins of 36.3% in the last 12 months, while gross margins have increased over the past 5 years from 32.8% in 2018 to 35.9% in the most recent fiscal year:
Genuine Parts Company has fairly high gross margins, because their gross margins are over 30%.
Ideally, we’d like to see companies with over 50% gross margins because that indicates that customers are willing to pay a premium to the company’s cost to fulfill the product or service.
However, Coca-Cola has only seen fair gross margin trends over the past 5 years because the company’s gross margins have fallen slightly.
Profitability After Corporate Costs (Operating Margins)
Operating margins measure what percentage of revenue remains as operating income after a company covers its operating expenses, and it’s one of the best measures of profitability for investors to compare companies.
Genuine Parts’s main operating expense is its Selling, General & Administrative (SG&A) expenses.
SG&A includes costs for the corporate offices, segment headquarters, distribution centers, stores and branches, and more.
Operating margins exclude interest payments and taxes, which makes operating margins the preferred ratio to compare profitability for different companies on an “apples-to-apples” basis.
Genuine Parts Company’s operating margins have noticeably risen over the past 5 years, from 6.3% in 2018 to 7.8% for the most recent fiscal year:
Operating margins have seen steep growth over the past 5 years, which is good because the company is becoming more profitable.
Analysts expect GPC to continue expanding its operating margins over the next 5 years:
Analysts expect Coca-Cola’s operating margins to increase at a compound annual growth rate of 0.2% from 7.8% in fiscal year 2023 to 7.9% in fiscal year 2028.
This shows that the company is becoming more profitable as it grows and expanding its operating leverage.
Genuine Parts’s Turbocharged Profit Engine (ROIC)
Return on invested capital (ROIC) is often considered the holy grail of profitability because it measures the total return that all investors are making on their investment in the company.
The formula takes the company’s annual profit and divides by the company’s total invested capital, or Enterprise Value (Market Cap + Debt – Cash).
To give you a visual example, let’s say a company has a 15% return on capital. If you invest $100 into the business, the business machine will start to compound the value of your investment:
- Year 0: $100
- Year 1: $120
- Year 2: $144
- Year 3: $172.80
- Year 4: $207.36
- Year 5: $248.83
Return on capital measures how businesses print money, and analyzing GPC’s return on capital helps investors see whether GPC is a good stock to buy.
Genuine Parts Company’s return on capital has seen strong growth over the past 5 years, rising from 15.6% in 2018 to 17.9% in the most recent fiscal year:
We would ideally like to see 20% returns on capital for Genuine Parts Company to be a really good stock to buy, but consistent, double-digit returns on capital are still impressive.
GPC’s Earnings Inspection
Companies with high earnings quality are less likely to experience sharp profitability declines and are generally more transparent and trustworthy for investors.
This can lead to more stable stock prices and better long-term investment performance, so it’s an important measure of a company’s financial health. Analyzing GPC’s financial health is a key part of analyzing whether GPC is a good stock to buy.
How real are GPC’s earnings?
We like to see that a company’s Cash from Operations exceeds its Adjusted Net Income + Depreciation & Amortization because this metric indicates whether the company has a good income-to-cash conversion.
It also shows how “real” the earnings are because sometimes companies will report earnings massively inflated from the actual cash the business receives.
You can see that Genuine Parts Company’s cash from operations (blue) is generally greater than or equal to the company’s adjusted net income (black) + depreciation & amortization (green), which shows strong cash flow efficiency:
This basically means that the company has legitimate cash flow to back its earnings, so the business has a good income-to-cash conversion.
What’s GPC’s free cash flow growth rate?
A company with strong free cash flow generation can generate surplus cash, invest in growth opportunities, pay dividends, and even buy back shares.
Free cash flow refers to a company’s Operating Cash Flow minus Capital Expenditures, which measures the total cash the business generates and subtracts necessary investments in property, plant, and equipment.
FCF is one of the most popular metrics for investors to track because consistent free cash flow growth is crucial for strong companies. Even though GPC’s free cash flow has risen and fallen over time, FCF has grown from $594 million in 2019 to $923 million in 2023:
Analysts expect Genuine Parts Company to be able to grow free cash flow at a 10.6% CAGR over the next 5 years, which will help to increase shareholder value.
Consistent free cash flow growth is an important factor in finding good stocks to buy because it’s one of the primary drivers of shareholder value.
How safe is GPC’s debt?
Debt ratios are crucial for assessing a company’s financial risk.
High levels of debt can indicate potential financial instability, especially if the company faces a downturn or rising interest rates. Conversely, low debt levels may suggest that a company is stronger and can withstand economic downturns.
Assessing debt ratios for more mature businesses like Genuine Parts Company is especially important because it helps ensure the company’s strong cash flows and low risks of default or financial insolvency.
Net Debt/EBITDA
This ratio measures a company’s ability to pay off its net debt (total debt minus cash) with its earnings before interest, taxes, depreciation, and amortization (EBITDA). It’s simply net debt divided by EBITDA.
This ratio is a key indicator of a company’s financial health and leverage. It’s better to see a low Net Debt/EBITDA ratio because this suggests that a company is less reliant on debt to finance its operations.
Over the past 10 years, GPC’s Net Debt/EBITDA ratio has fluctuated somewhere between 0.5x and 2.5x, which is healthy and reasonable:
Currently, GPC has a fair Net Debt/EBITDA of about 1.30x, which is lower than the 3 previous years, and show that debt is trending in the right direction.
Can GPC easily cover its interest payments?
The Interest Coverage ratio measures how easily a company can pay interest on its outstanding debt. It’s calculated by dividing earnings before interest and taxes (EBIT) by the company’s interest expense.
It’s better to see a higher interest coverage ratio because this indicates that the company generates enough earnings to cover its interest payments comfortably.
Meanwhile, a low interest coverage ratio can be a red flag because it indicates that the company might have difficulties meeting its interest obligations.
Over the last 12 months, Genuine Parts has seen a strong interest coverage ratio of 27.88x:
We like to see companies with interest coverage ratios anywhere over 3x, so GPC’s nearly 30x interest coverage ratio is incredibly strong.
Investors really have nothing to worry about regarding Genuine Parts Company’s ability to pay the interest on its debt.
GPC’s strong financial stability serves as a positive indicator that GPC could be a good stock to buy.
How well-tuned is GPC’s business?
One easy way to measure whether a company is becoming more efficient over time is to examine its cash conversion cycle.
The Cash Conversion Cycle (CCC) measures how quickly the company can receive cash after creating its products and how slowly it pays out cash for its expenses. It is calculated by combining three key components:
- Days Sales Outstanding (DSO): Measures the average number of days a company takes to collect cash after selling something.
- Days Inventory Outstanding (DIO): Measures the average number of days it takes a company to sell its inventory.
- Days Payable Outstanding (DPO): Measures the average number of days a company takes to pay its suppliers.
The formula for CCC is:
CCC = DSO + DIO − DPO
The lower the Cash Conversion Cycle – the better.
The Cash Conversion Cycle is important for companies that buy and sell physical inventory, like Coca-Cola.
Companies with low CCCs get paid quickly, which means they hold as little inventory as possible and receive cash from sales quickly.
Additionally, companies with low CCCs tend to have agreements with their suppliers to pay them out later. All in all, they collect cash fast and pay cash out slowly.
Genuine Parts Company’s cash conversion cycle has improved dramatically in the past 10 years from 63 days to just 14 days.
The company also improved after Covid, dropping its CCC from 26 days in fiscal year 2020 to 14 days in fiscal year 2023:
These improvements were driven primarily by GPC getting paid faster from its customers.
How quickly do customers pay GPC?
Days Sales Outstanding (DSO) measures the average number of days a company takes to collect payment after a sale.
It is calculated by dividing accounts receivable by total sales, multiplied by the number of days in the period (typically 365 for 365 days in a year).
Investors prefer to see companies with a lower DSO, which means that the company collects payments quickly, improving cash flow and reducing the risk of bad debts.
Conversely, companies with consistently high DSO might have issues with cash flow management or potential problems with customer creditworthiness.
Over the past 3 years, Genuine Parts has been able to reduce its DSO from 44 to 35, indicating that the company was able to see big efficiencies by turning its accounts receivable into cash quicker:
How quickly can GPC sell its inventory?
Days Inventory Outstanding (DIO) is a key measure of inventory management efficiency because it measures the average number of days it takes a company to sell its inventory.
It is calculated by dividing inventory by cost of goods sold (COGS), and multiplying by the number of days in the period (typically 365).
A lower DIO is good because it indicates that a company can sell its inventory quickly, which can reduce storage costs and minimize the risk of inventory going obsolete.
Efficient inventory management can lead to better cash flow and higher profitability, which makes DIO an important metric for investors to be aware of.
Over the past 3 years, Genuine Parts has been able to reduce its DIO from 117 days to 112 days, which means that the company was able to become a little more efficient:
How slowly can GPC pay its suppliers?
Days Payable Outstanding (DPO) measures the average time it takes a company to pay its suppliers after receiving inventory or services.
It is calculated by dividing accounts payable by cost of goods sold (COGS), and multiplying by the number of days in the period (usually 365).
A higher DPO is better because that means the company takes longer to pay its suppliers, which frees up cash that the company can use.
Over the past 3 years, Genuine Parts has seen its DPO basically stay the same, worsening slightly from 135 days in 2020 to 133 days in 2023:
Final Thoughts:
Genuine Parts Company has grown to be a mature business, so it’s especially important to evaluate the company’s financial safety and quality to see if it would make a suitable long-term investment.
Genuine Parts is a high-quality business with strong competitive advantages. This is evident from the company’s strong gross and operating margins and consistent returns on capital.
GPC also has strong financial safety with earnings adequately backed by cash flows, good debt ratios, and strong cash conversion efficiency with a cash conversion cycle that’s improved dramatically in recent years.
Genuine Parts Compnay is a high-quality business that’s financially safe to invest in, which means it could be a good stock to buy at the right price.
Check out GPC’s Analyst Estimates to get a full look at where Wall Street analysts think the company is going and Coca-Cola’s Valuation to see if the stock is appropriately priced.
Genuine Parts Company (GPC) Stock FAQs:
Is GPC a safe stock?
Genuine Parts (GPC) appears to be a safe stock because it has strong financial safety with a healthy Net Debt/EBITDA ratio of 1.3x, and an excellent Interest Coverage ratio of 27.88x. The company has also been becoming more efficient with selling products, decreasing its cash conversion cycle in the past 3 years from 26 days to 14 days.
Is GPC a good stock to buy right now?
GPC appears to be a high-quality stock with strong financial safety. The company saw a 17.3% ROIC in the past 12 months, and this metric has been improving for years. Additionally, GPC has seen big improvements in its operating margins, with analysts expecting the business to continue to become more profitable. It’s important to evaluate whether GPC aligns with your long-term investment goals and risk tolerance.
Is Genuine Parts a good dividend stock?
GPC delivered a strong 9.9% compound annual total shareholder return over the past 5 years, and GPC still looks like a good dividend stock. GPC’s dividend looks safe from cuts, with a low 44.4% payout ratio. Additionally, GPC has an incredible dividend track record, with 68 consecutive years of dividend increases. Analysts expect the dividend to stay strong, with analysts forecasting the dividend to grow at a 6.5% CAGR over the next 5 years. It’s important for investors to do their own research and consider their individual circumstances when deciding whether GPC is a good dividend stock to buy. Of course, this is not investment advice.
Is GPC a long-term buy?
Genuine Parts Company (GPC) is considered a solid long-term buy due to its robust distribution network, consistent revenue growth, and strong market position in the automotive and industrial parts industry that help the business achieve double-digit returns on capital every year. Investors should keep in mind that analysts only expect GPC to see low single-digit revenue growth over the next few years.
Who owns the most GPC stock?
Vanguard owns the most GPC stock with 17,391,795 shares worth $2.5 billion. You can see all of GPC’s biggest shareholders through TIKR’s Ownership tab.
Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. We aim to provide informative and engaging analysis to help empower individuals to make their own investment decisions. Neither TIKR nor our authors hold any positions in the stocks mentioned in this article. Thank you for reading, and happy investing!
