I’ve been thinking about Peter Lynch stocks lately, in the category he called “stalwarts.” These are companies that have achieved the distinction of being a world-class brand name who fast-growing days are behind it, but still are chugging along at 8%-12% earnings growth every year. They often play a intrinsic role in daily life.
So it’s always a pleasure to stumble upon a stalwart I had never heard of, because I frequently feel like I know every stock in the market. In this case, it’s a company with a $10 billion market cap with the exciting name of Genuine Parts Company (NYSE:GPC).
This is the perfect type of boring stock Mr. Lynch often talks about. Hold onto your hat and don’t get too excited when you learn that the company distributes automotive & industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, Canada and Mexico.
It’s important to understand just how deep the company drills (so to speak) into the parts arena.
The Automotive Parts Group segment distributes replacement parts for passenger and farm vehicles, small engines and heavy-duty equipment. This segment also distributes aftermarket accessory items to repair shops, service stations, fleet operators, dealers, leasing companies, bus and truck lines, mass merchandisers, farms, industrial concerns and individuals. The parts often are distributed under a name you likely know: NAPA.
The Industrial Parts Group segment distributes parts for mechanical and electrical power transmission, industrial automation, forest products, metal, mining, automotive, petrochemical and pharmaceutical industries. The Electrical/Electronic Materials Group segment distributes wire and cable, insulating and conductive materials, assembly tools, test equipment and custom-fabricated parts to original equipment manufacturers, motor repair shops, specialty wire and cable users and various industrial assembly markets. And then there’s the obvious items associated with office products.
I know, I know. Calm down. Take a drink. Relax. But remember — things break down. Look around your home, your office and any business you visit. Think about how many things there are around you that are made up of parts.
Now you know why Genuine Parts is a $10 billion company.
GPC has shown great resiliency and consistency. The company put up 19% annual earnings growth in 2010 and 2011, though that’s expected to drop to 14% this year and 8% annualized thereafter. Genuine Parts sits on $525 million in cash, and about the same in debt. But what I really love is the consistency of free cash flow. It’s been more than $500 million each of the past three years, and GPC pays half of that out as a 3.1% dividend.
Why is cash flow so strong? Because GPC is in distribution and not manufacturing. If you have a large distribution presence in any market, you are golden. That’s where the money is. The only issue to watch for is inventory, and Genuine Parts seems to have a handle on that.
GPC presently trades at 16 times earnings. I think it’s just a tad pricey — take the 8.25% long-term growth rate, add the 3.1% yield, give it a slight premium for the great cash flow and I could justify 12 to 13 times earnings. So I’d say long-term investors could jump in here, or just wait for a market pullback and get in on a solid stalwart for life.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.