Wouldn't Get Into This Car Just Yet

 | Jan 03, 2013 | 1:00 PM EST  | Comments
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John Holder, a board member at auto-parts company Genuine Parts (GPC) ratcheted up his stake in the company on Dec. 31, buying 1,000 shares at an average price of $63.03. Holder had only owned 500 shares before this purchase.

In general, insiders should logically prefer to avoid doing this; instead, we would expect them to diversify their holdings away from their own company. So when we see an insider purchase, we take it as a sign that the exec is particularly confident in the stock -- and it also partially explains why, on average (though not always), insider purchases tend to be bullish signs.

Still, there's valuation to consider. While many auto-related companies are trading at very low earnings multiples amid tough macroeconomic conditions, Genuine Parts carries a trailing price-to-earnings multiple of 16x at its current market capitalization of $10 million. We think this is primarily because the company provides replacement parts, and thus benefits from consumers choosing to keep their current cars longer, rather than buy new ones. Note that the stock's beta is 0.7, so it moves with the broader market, but not in a particularly strong fashion.

In the third quarter, the company saw sales of auto parts -- which only comprise around one-half of total revenue -- rise 2% vs. the prior year. That's slightly below the revenue-growth rates in Genuine Parts' other segments, which include industrial parts, at about one-third of sales; office products at 13%; and electronic equipment, which makes up most of the remainder.

Selling, general and administrative expenses flat were flat with the prior year, and net income rose 14%, with similar profit increases having occurred in the first half of 2012. While its trailing P/E ratio comes to 16x, the forward multiple is just 15x, based on very modest earnings targets from sell-side analysts. Should management run out of ways to hold down costs, we can certainly see earnings dampened by the modest top-line growth. Still, the stock sports a moderate dividend yield and at least some protection from a poor auto market -- so we can see at least the possibility that Genuine Parts will turn out to be a good value.

As for big investors in the name, at the end of the third quarter Adage Capital Management owned about 850,000 shares. The firm is managed by Phil Gross and Robert Atchinson, who had previously worked at Harvard Management. Renaissance Technologies -- which has performed well enough to make founder Jim Simons him a multi-billionaire -- nearly tripled its stake to a little over 500,000 shares.

Elsewhere in the auto space, General Motors (GM) has been a hot-value stock pick, and peer Ford (F) is seeing some interest as well, with respective forward P/Es of 7x and 9x. Of course, as we've mentioned, the auto market remains depressed, most notably in Europe, so the automakers tend to trade at low multiples.

We can also compare Genuine Parts to smaller auto-parts stores such as Advance Auto Parts (AAP) and AutoZone (AZO), whose shares trade in the 11x-to-13x range -- in between those of Genuine Parts and the automakers. Betas are low at these two companies, as well, which suggests they are at least as well-protected as Genuine Parts from unfavorable macroeconomic conditions. However, last quarter earnings growth was weaker vs. the prior year, and net income actually came in lower for Advance Auto Parts.

We can see why Genuine Parts might merit a premium to some other auto-related companies, but we're not sure that it's really a better buy than the very low-priced shares of GM, Ford or other automakers. Again, auto-parts stores such as Advance and AutoZone also trade at discounts to Genuine Parts -- and it may be worth looking to see if that gap could narrow.

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