Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Lowest PEmg Companies for EnterprisingÂ Investors.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Genuine Parts Company (GPC)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Genuine Parts Company is a service organization engaged in the distribution of automotive replacement parts, industrial replacement parts, office products and electrical/electronic materials. The Company operates in four: Automotive Parts Group, Industrial Parts Group, Office Products Group and Electrical/Electronic Materials Group. The Automotive Parts Group distributes automotive parts and accessory items. In addition to over 427,000 available part numbers, the Company offers inventory, cataloging, marketing, training and other programs in the automotive aftermarket. The Industrial Parts Group is operated as Motion Industries, Inc. (Motion), a wholly owned subsidiary of the Company. During the year ended December 31, 2012, the Company’s business were conducted throughout the United States, in Canada and in Mexico from approximately 2,000 locations. On February 1, 2012, the Company acquired Light Fabrications Inc.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$60.78|
|Value Based on 0% Growth||$35.63|
|Market Implied Growth Rate||5.98%|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Genuine Parts Company is suitable for Enterprising Investors, but Defensive Investors are not quite as keen, and have concerns with the low current ratio along with the high PEmg and PB ratios. Â The company passes all of the requirements of the Enterprising Investor, though. Â As a result, Enterprising InvestorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors through a review of ModernGraham’s valuation of O’Reilly Automotive (ORLY). Â From a valuation standpoint, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.83 in 2010 to an estimated $4.19 for 2014. Â This demonstrated level of growth supports the market’s implied estimate of 5.98% earnings growth, and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Genuine Parts Company (GPC)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Be sure to review the previousÂ ModernGraham Valuations of Genuine Parts Company (GPC)!
Disclaimer: Â The author did not hold a position in Genuine Parts Company (GPC) or any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.