Genuine Parts Company (GPC) reported a 22% rise in profit to $151.8 million in the second quarter of 2011 from $124.5 million in the year-ago quarter. Earnings per share (EPS) in the reported quarter was 96 cents, up 23% from 78 cents per share delivered in the comparable quarter last year. Quarterly EPS also surpassed the Zacks Consensus Estimate by 7 cents.
Total sales in the quarter grew 12% to $3.18 billion, exceeding the Zacks Consensus Estimate of $3.12 billion, driven by improvements across all its businesses and favorable conditions in the aftermarket. Operating profit also increased 18% to $264.6 million, despite a rise in selling, general and administrative expenses (SG&A). SG&A increased 9% to $651.6 million during the quarter.
Sales in the Automotive Parts segment grew 9% to $1.59 billion, the Industrial Parts segment rose 19% to $1.05 billion, the Office Products Group expanded 4% to $418.0 million and the Electrical segment soared 28% to $136.8 million.
Genuine Parts had cash and cash equivalents of $516.7 million as of June 30, 2011 compared with $411.9 million in the year-ago period. Long-term debt reduced to $250 million at the end of the reported quarter versus $500 million in the prior-year quarter.
During the first six months of 2011, Genuine Parts’ net cash flow from operations declined to $250 million from $352.5 million in the prior-year quarter, despite higher profit. This was primarily attributable to an increase in excess tax benefits from share-based compensation. Meanwhile, capital expenditures increased to $27.2 million from $18.1 million in the second quarter of 2010.
Genuine Parts has undertaken various initiatives to boost sales and earnings, such as product line expansion, penetration into new markets and cost-saving activities. The company relies on a diverse product portfolio for top-line and bottom-line growth.
In the Automotive Parts segment, the company expects growth of 2%–5% per year going forward, with NAPA representing about 10% of the market share. Demand is expected to remain strong given the average age of vehicles on the road has risen to almost 10 years.
However, lower consumer confidence and higher competition is thwarting Genuine Parts' efforts to drive sales growth in its Automotive Parts segment. The company’s key competitors include Advance Auto Parts Inc. (AAP), AutoZone Inc. (AZO) and W.W. Grainger Inc. (GWW). Moreover, it has been unable to institute meaningful price hikes in its automotive business due to pressure from retailers. These factors can put pressure on margins going forward.
Taking into account the above conditions, we have a long-term Neutral recommendation on the stock.
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