Why You Should Ditch Genuine Parts Company Ahead of Earnings (GPC)

GPC looked good at the end of last year, but expectations are dimming

In a market where credit quality has become an increasing concern, we’ve seen strength from companies that have not necessarily had strong growth but boast solid financials and consistent results. Genuine Parts (GPC), an auto and industrial parts distributor, was one of those companies, and it’s why I was bullish on the stock near the end of last year despite so-so overall performance in 2015.

GPC has a long history of steady sales, earnings growth and dividend increases, all driven by the company’s strong competitive position and the growing demand for automotive replacement parts as the auto fleet ages.

Between 2007 and 2014, revenue increased from $10.8 billion to $15.3 billion, while earnings increased from $2.98 to $4.61 per share, growing each year with the exception of the 2008 and 2009 recession years. It’s these numbers that made this stock a favorite among conservative investors up until recently.

The Problem With GPC Stock Now

The story changed at the turn of the new year as currency issues and weakness in the industrial segment put pressure on the company, causing results to stumble. I’m not as bullish on the stock anymore, but it doesn’t really have anything to do with the company itself — rather, it’s weighing the risks of an uneven global economy.

gcp stock chart

Plus, expectations for the stock have cooled significantly since last autumn, when analysts were thinking the company was likely to earn somewhere around $4.67 per share for all of 2015 and potentially $5.09 per share in 2016. Now, four months later, rumor has it that the target for 2015 fourth-quarter earnings is down 7.3% ($1.02 per share) and the 2016 target is down 4.7% (averaging $4.86 per share).

That math turns what was once a 9% growth story into a 6% growth story. That’s still pretty good compared to what we’re seeing elsewhere in the market, but there just isn’t enough immediate upside here to keep me hooked. A lackluster earnings report next week (Feb. 16) could put a dent in share prices, so it’s too risky for my taste in this tough environment where we’ve seen even positive results get punished.

Once we’re past this round of earnings, GPC has the potential to become a bright spot in the industrial group once again. For now, though, I’m steering clear to avoid any collateral damage brought on by disappointing numbers.

Hilary Kramer is the editor of GameChangersBreakout Stocks Under $10High Octane TraderAbsolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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