Why Is This Auto Parts Company the Best For Your Portfolio?

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Genuine Parts Company (NYSE: GPC) it the leading U.S. wholesale distributor of automotive replacement parts, and its better known by the name of its distribution centers and stores, NAPA. With steadily rising revenues over the past several years, as well as a strong balance sheet, healthy dividend yield, and aging vehicle population in the U.S., Genuine Parts looks like a winner at first glance. Let’s take a closer look at the company, and then take a glance at who they compete with to see which would make the best addition to our portfolio.

About the company

Genuine Parts operates throughout North America, and recently added Australia to its global footprint with the recently acquired Exego Group. The company operates through four different segments, two of which are to be expected and the other two a bit surprising.

Not surprisingly, the automotive parts segment is the company’s largest, accounting for about half of the total sales. This segment includes the network of over 6,000 NAPA auto parts stores, about 1,100 of which are company-owned. Closely related is the company’s industrial parts segment, which accounts for 34% of Genuine Parts’ sales and distributes a broad line of replacement parts for various industrial vehicles and machinery, such as heavy farm equipment.

One of the company’s not very well-known segments is their office products group, which makes up 13% of the company’s sales and operates under the S.P. Richards brand name. The S.P. Richards Company is over 160 years old and is one of the largest business and office products wholesalers with a network of 40 distribution centers that carry their own brand, as well as the leading name brand office products. The office supply segment produced about $1.7 billion in revenue last year, and in my opinion adds some very valuable diversification to Genuine Parts’ business. The company also has a small electrical material segment, which wholesales supplies for the electrical industry and makes up the remaining 4% of the company’s revenue.

The numbers

At 18.4 times TTM earnings, Genuine Parts may seem a little pricy for such an established and stable company, but there is a good reason. Growth is expected in all four of the company’s segments, as Genuine Parts stands to benefit from the U.S. economic recovery more than most. The total number of vehicles in the U.S. is on an uptrend, as is the average age of those vehicles and hence the need for replacement parts. As far as the office supply business goes, a lot of companies were on severe spending restrictions as a result of the recession, and as the economy improves, office supply budgets will grow accordingly.

Genuine Parts is expected to earn $4.51 per share this year, rising to $4.90 in 2014. This translates to a forward earnings growth rate of around 9%, which I believe justifies the valuation when combined with the company’s strong fundamentals. Genuine Parts has a very healthy balance sheet, which actually has more cash on hand than debt, a great indicator of financial health. The company also pays a very nice dividend yield of about 2.8%, which has been raised every year, including during the peak recession years.

A glance at the major competition: AutoZone and Advance Auto Parts

AutoZone (NYSE: AZO) operates more than 5,000 stores in the U.S. and Mexico. While AutoZone, unlike Genuine Parts, is strictly an automotive retail play, they have grown their sales very impressively over the years. AutoZone appears to be a bit “cheaper” at 17.5 times TTM earnings with 12% forward growth expected, there are a few negatives to be aware of. First, AutoZone pays no dividend whatsoever, which is sure to be a turn-off to income-seekers. Also, the company is not quite as financially impressive, with over $3.7 billion more debt than cash.

Advance Auto Parts (NYSE: AAP) is about half the size of the others in terms of market cap, and operates about 4,000 retail stores. Advance Auto Parts trades for the lowest P/E of the three at just 15.5 times TTM earnings, and has a projected 10% forward growth rate. While the company does pay a dividend, it is not very significant at just 0.29% annually. However, Advance Auto Parts does have a very strong balance sheet with virtually no net debt.

Buy, Sell, or Hold?

While the other two don’t look expensive by any means, I simply like Genuine Parts much better due to its high, steadily rising yield, great balance sheet, and perhaps most importantly, the diversification of its business. While it is hard to go wrong with any of these three as long as the economy continues to improve, Genuine Parts seems the best equipped to weather the bad times as well, making it my favorite of the group.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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