real parts (NYSE:GPC) looks poised to benefit from pricing initiatives and potential M&A. Serving markets that are less economically significant than most, I think the stock has upside from here.
The life history of the organization
GPC distributes automotive and industrial replacement parts. of The company operates in North America, Europe, and Australia and Asia, which it refers to as Australasia.
Approximately 77% of its sales come from North America, 14% from Europe and 9% from Australia.
In the auto market, the company sells parts through distribution centers, company-owned stores and independent stores. In North America, it operates under the NAPA (National Automotive Parts Association) brand. In Europe, it operates under the NAPA brand as well as Groupauto, Precisium Group, Pièces Auto, UAN, Alliance Automotive Group Germany, PartsPoint and Lausanne. In Australia, it operates under the NAPA brand and Repco.
The company offers more than 725,000 different auto parts for most vehicle makes and models, including motorcycles, EVs, RVs, buses and farm equipment.
On the industrial side, the company distributes its products through distribution centers, service centers and branches. It serves more than 200,000 maintenance, repair and operations (MRO) and OEM customers throughout the US, Canada, Mexico and Australia. Motion control represents about 40% of sales in the segment.
opportunities and risks
GPC has done a great job streamlining the business in its two key markets – automotive and industrial – and investing in technology to improve efficiency and drive growth. Over the past two years, the company has adopted more modern, cloud-based technology stacks to help in the areas of supply chain management, category management and pricing.
Speaking at the Stephens Investment Conference, CFO Herbert Napier said:
“Those investments are coming from the use of technology and the technology we’re leveraging is helping us drive the business forward, that’s a big differentiator for me. Being smarter about how we manage the supply chain and being smarter about category management.”
“In this environment right now, what we’ve seen is availability where our customers are very focused and focused on quality service and ultimately price. And so making sure you get the right part in the right network at the right time is a big focus. Our technology and analytics tools are not only in the supply chain, but in category management and then They were able to help us with pricing.
Pricing has been a big focus for GPC, and the investment in analytics is providing information on which segments are performing better, as well as making strategic price increases. It can do this at both the SKU and market level. On the Q4 earnings call, President and COO William Stengel said:
“We’re seeing great price action on both sides of the business, and especially in American automotive. I would say, they’re one of the most flexible groups in terms of what they’re doing around pricing. We’ve been in this for 12 to 18 months now in a very robust way, both in terms of the technology we use, the data, working with third parties, etc. And we’re actively thinking about the right way to execute pricing strategies in line with the market. This is the core of what we do.
Digital transactions, both B2B and e-commerce, is another investment the company is focused on. According to William Stengel, President and COO at the Gabelli conference:
“For us, the way we think about it is that our electronic interaction with customers, do-it-for-me or do-it-yourself, is totally relevant. They make up about 20% of our interactions with customers.
So integrating with the customer, whether it’s NAPA online, whether it’s our B2B electronic interface, is critical to that customer experience. You have endless possibilities to make that easy. And when you do that, it leads to growth and customer loyalty, wallet share, transaction volume and transaction ticket volume.
So that’s a big part of what we’re doing and investing in. And I think the industry and many of these industries will continue to invest in the digital experience.
As I noted in a recent article on Veritiv ( VRTV ), the move to digital transactions is a successful strategy for many companies in the distribution business, whether it’s Builders FirstSource ( BLDR ) or The Chefs’ Warehouse ( CHEF ) in home construction. ) in food distribution. The transition to digital marketing can be both easy for customers as well as marginal recognition.
GPC’s overall strategy appears to be working as evidenced by strong sales growth and improving margins. The company’s automotive segment saw its margins improve by 140 basis points from Q4 2019, while its industrial segment saw its segment margins improve by 240 basis points. Given the low margin profile of distribution businesses, margin improvement will be a major driver.
M&A is another opportunity GPC is looking to capitalize on, and another common growth driver they see outside of the distributor’s growth playbook. Buying distributors is a great way to expand your reach geographically and/or in neighboring areas. Discounts will also be highly integrated as companies can take back-end costs and gain significant scale. GPC bought industrial distributor Kaman Distributors Group for $1.3 billion in 2022, but will still be on the move for more deals.
As we turn to risks, the macro environment is on everyone’s mind. The automotive segment of GPC’s business is pretty economically indifferent, and can even be a bit counterintuitive. This is because when a car needs to be fixed, most people have to. Also, during economic downturns, people keep their cars longer, which leads to more maintenance and needed parts.
GPC’s industrial business, on the other hand, is a bit more sensitive to the macro environment. As such, the company forecasts a stronger 1H 2023 in this segment, with the possibility of slower growth in the latter half. The company has indicated that it has little transparency in this business, but that it is corrupt in most of the end markets it serves.
GPC trades at a 13.1x EV/EBITDA multiple with a 2023 EBITDA deal worth $2.13 billion. Based on a 2024 EBITDA deal of $2.24 billion, it trades at around 12.5x.
It trades at 19.4x forward EPS, analysts estimate 2023 EPS at $8.92.
It is expected to grow revenue by 5 percent in 2023, slowing to 3 percent growth in 2024.
Meanwhile, GPC forecasts 2023 revenue growth of 4-6% and EPS of between $8.80-$8.95.
The company generates about $1.5 billion in cash, and is leveraged at 1.7x by the end of 2022.
I love the technology initiatives that GPC is pursuing to improve its business. Pricing appears to be in the early stages, and this should really boost results as the company continues to optimize both sources and the prices it charges. Overall, I like the distribution business model, and technological improvements will help drive these types of businesses, given their low margins. Meanwhile, the markets that GPC serves are a little smaller economically than most.
Overall, I think GPC is a great company in the industry. I think the stock is higher to $215, which would be about a 15x multiple on 2024 EBITDA.