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Core Growth Creeps Along as Genuine Parts' Acquisitions Add Revenue

By Asit Sharma - Oct 17, 2019 at 4:10PM

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Management lauded the company's sales results while tweaking full-year expectations.

While Genuine Parts Company's (GPC -0.07%) comparable sales growth could benefit from a higher expansion rate, give the organization credit for its acquisitiveness: Revenue from business purchases helped offset sales headwinds to furnish the distributor with mid-single-digit top-line growth this quarter. As we dissect the last three months of operations below, note that all comparative numbers are presented against the prior-year quarter.

Genuine Parts: A bird's-eye view of the quarter

Metric Q3 2019 Q3 2018 Change
Revenue $5.02 billion $4.72 billion 6.4%
Net income $227.5 million $220.2 million 1%
Diluted earnings per share $1.56 $1.50 4%

Data source: Genuine Parts Company. 

Significant highlights of the report 

A trailer truck repair person using an augmented reality tablet device to visualize a part repair.

Image source: Getty Images.

  • Genuine Parts booked comparable sales growth of 1.2%, and benefited from 6.7% in revenue contributed from acquisitions. These factors were offset by 1% of negative currency translation and 0.7% of foregone revenue resulting from the company's disposition of Grupo Auto Todo in the first quarter of 2019.
  • In keeping with its overarching strategy, the third quarter was a busy period for Genuine Parts in the dealmaking category. The parts retailer gobbled up the remaining 65% of equity in Sydney, Australia-based industrial parts distributor Inenco in July, with an effective date of July 1. The company had purchased its original 35% stake in Inenco in April of 2017.
  • Genuine Parts also increased its investment in Sparesbox, which it calls "Australia's leading online auto parts and accessories business," to 87%, also effective July 1.
  • The company continued a trend of dispositions, selling its subsidiary Electrical Specialties Group of Motion Industries (EIS) to a private equity firm on Sept. 30, the last day of the quarter, for an undisclosed amount.
  • Gross margin improved 100 basis points to 32.4%. Operating margin dropped roughly 40 basis points, however, to 5.9%, as a rise in selling, administrative, and other expenses outstripped the benefit of higher gross profitability.
  • After accounting for currency effects, gains on equity investments, mergers and acquisitions (M&A) transaction costs, and termination fees, adjusted earnings per share (EPS) of $1.50 narrowly rose against the prior-year quarter's adjusted EPS of $1.48.

Management's take on results

In Genuine Parts' earnings press release, CEO Paul Donahue alluded to the bulk power of growth through acquisition, but also observed that the company is making incremental progress on both "comps" and profit margins:

Our third quarter results were highlighted by several accomplishments, including our achieving the $5 billion sales mark for the first time in the history of the Company. In addition, we were pleased to report positive comparable sales in our U.S., Canadian and Australasian automotive businesses as well as our industrial operations, and we further improved our gross margin. This translated to operating margin expansion in the Industrial and Business Products segments, an improved overall [adjusted] margin performance and strong cash flows for the quarter...

We were pleased to perform in-line with our expectations for the quarter and are committed to our growth strategy and cost savings initiatives over the near and longer terms. We believe our focus in these areas will serve to deliver improved results and create significant long-term value for our shareholders

Looking ahead: Outlook revisions

Given Genuine Parts' disposition of EIS at quarter-end, and taking into account sales progress thus far in the year, management dialed back the company's revenue growth expectation in 2019, from a year-over-year advance of 4.5%-5.5% to an expectation of 3.5% growth against 2018.

The company also reduced its 2019 adjusted EPS expectation to $5.60-$5.68, against a previous range of $5.65-$5.75. This tweak is again due to the removal of EIS revenue and earnings from Genuine Parts' books following the third-quarter sale.

Despite its dealmaking prowess, as an automobile stock-related investment, Genuine Parts is having a rather quiet year -- shares are up just 3% year to date. In the upcoming quarter, shareholders will undoubtedly look for management's 2020 forecast to include ambitious projected M&A activity. But they'll also expect an outlook for more vibrant core growth that could help catalyze share price movement next year.

Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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