Slowdown Damps GPC Optimism

A Hold recommendation has recently been issued to automobile and industrial parts distributor Genuine Parts Company (GPC) by Zacks senior automobile industry analyst Paul Raman, CFA. Here's what his latest update had to say about it:

'Genuine Parts Company has undertaken various initiatives such as product line expansion, penetration into new markets, and cost-saving activities to boost sales and earnings. Genuine Parts has been diversifying its revenue base to reduce excessive dependence on the automotive replacement market. The company's industrial businesses are improving as the U.S. economy is recovering. The balance sheet is strong.

'However, our optimism is dampened by the slowdown in the replacement market and rising input prices. Currently, the shares of Genuine Parts are trading at 12.8x our 2008 EPS estimate of $3.26, below the industry median of 13.5x. The company's ability to generate cash flow and improve its growth makes us optimistic about the stock's performance.

'Weak pricing and a soft automotive and industrial parts businesses are hindering progress. Accordingly, by using our 2008 EPS estimate and a forward multiple of 13.8x, wer arrive at a target price of $45. We also maintain our Hold recommendation.'

Advance Auto Parts Costs Rising

The following excerpts explain why Zacks senior automobile industry analyst Paul Raman, CFA maintains his Hold recommendation on Advance Auto Parts, Inc. (AAP), the auto accessories retailer:

'Advance Auto Parts, Inc. is a specialty retailer of automotive parts, accessories, and maintenance items. The company primarily caters to the do-it-yourself (DIY) and professional installer markets. Though it is generating top-line growth by opening new stores, the company is currently facing a challenging industry environment. To combat the difficult industry metrics, AAP has reviewed its business strategies to drive sales, lower costs, and increase return on invested capital (ROIC).

'Meanwhile, AAP has implemented an aggressive program to reduce inventory of other less profitable products, which in turn will free up cash for enhancing parts availability. The company also is directly sourcing products from low-cost countries in an effort to improve margins. This step will also help in lowering selling, general & administrative (SG&A) expenses and increasing ROIC. Around 82% of the company's stores have commercial programs in place. Do-it-for-me (DIFM) programs in-store generate 20-30% incremental sales on top of the DIY base, improving store profitability. DIFM also grows at 4%, as opposed to the 1% growth of the DIY market.

'Currently, shares of Advanced Auto Parts, Inc. are trading at 12.6x our 2008 EPS estimate of $2.70. We are impressed by AAP's performance in the face of a challenging environment and difficult sales comparisons. AAP is striving hard to increase its square footage growth and the company has healthy cash flow. However, it is witnessing rising SG&A expenses, which leads us to rate the stock a Hold with a six-month target price of $36.