Zacks_Analysts' Blog : Genuine Parts' 3Q Profit Rises - Analyst Blog

Genuine Parts Company (GPC) reported a 15% rise in profit to $151.8 million in the third quarter of 2011 from $131.8 million in the year-ago quarter. Earnings per share (EPS) in the reported quarter came in at 97 cents, up 17% from 83 cents delivered in the comparable quarter last year. Quarterly EPS also surpassed the Zacks Consensus Estimate by 2 cents.

Total sales in the quarter grew 11% to $3.29 billion, exceeding the Zacks Consensus Estimate of $3.21 billion, on the back of improvements across all its businesses, favorable conditions in the aftermarket and the company-specific sales initiatives.

Gross profit was $948.5 million compared with $853 million in the year-ago quarter. Despite higher selling, general and administrative expenses (SG&A) (up 10% to $680 million), operating profit rose 19.3% to $276.8 million during the reported quarter.

Sales in the Automotive Parts segment grew 11.4% to $1.61 billion, the Industrial Parts segment rose 18.3% to $1.09 billion, the Office Products Group expanded 2.9% to $447.3 million and the Electrical segment soared 22.2% to $143.3 million.

Genuine Parts had cash and cash equivalents of $534.8 million as of September 30, 2011 compared with $531.7 million in the year-ago period. Long-term debt reduced to $250 million at the end of the reported quarter from $500 million at the end of the prior-year quarter.

During the first nine months of 2011, Genuine Parts’ net cash flow from operations declined to $497.4 million from $568.4 million in the prior-year quarter, despite a rise in profit. This was primarily attributable to an increase in tax benefits from share-based compensation. Meanwhile, capital expenditures increased to $63.9 million from $58.9 million in the corresponding period of 2010.

Our Take

Genuine Parts has undertaken various initiatives to boost sales and earnings, including product line expansion, penetration into new markets and cost-saving activities. The company primarily relies on a diverse product portfolio for top-line and bottom-line growth.

In the Automotive Parts segment, the company expects an annual growth of 2%–5% going forward with National Automotive Parts Association (NAPA), representing about 10% of the market. Demand should remain strong as the average age of vehicles on the road has increased to almost 10 years.

However, lower consumer confidence is thwarting Genuine Parts' efforts to drive sales growth in its Automotive Parts segment. Moreover, it has been unable to institute meaningful price hikes in its automotive business due to pressure from retailers. These can hamper its margins going forward.

Taking into account the above conditions, we have a long-term Neutral recommendation on the stock.