Apr 10, 2018

Genuine Parts Company (GPC – NYSE) $90.38

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 4Q17 & FY17 Earnings Update

Previous Edition: 4Q17 Earnings Flash Update, Feb 20, 2018.

Brokers’ Recommendations: Neutral: 66.7% (6 firms); Negative: 22.2% (2); Positive: 11.1% (1); Prev. Ed.: 6; 2; 1

Brokers’ Target Price: $95.83 (↑ 16 cents from last edition; 6 firms) Brokers’ Avg. Expected Return: 6%

NOTE: The tables below (Revenues, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.

Portfolio Manager Executive Summary

Genuine Parts Company (Genuine Parts or the company) is a distributor of automotive and industrial replacement parts, office products and electrical/electronic materials in the U.S., Canada and Mexico.

Of the nine firms in the Zacks Digest group covering the stock, six firms rendered neutral rating, two conferred negative rating and one gave a positive rating. Out of these, six firms provided target prices.

Neutral or equivalent outlook (6/9 firms or 66.7%) – These firms have a neutral outlook on the end- market prospects after the last-reported quarter. They believe that the sales growth accelerated due to increase in international sales with a strong performance in APAC. However, improved winter conditions in the United States will drive domestic sales. Further, rise in demand will lead to enhanced comparable sales and rise in NAPA market share, which are likely to drive sales for the company. Also, robust growth, witnessed by the Motion Industries, will add to its financials. Also, the company’s cost control efforts and strong cash flow look favorable. It might also benefit from acquisitions announced to date, partly offset by higher amortization from acquisitions and a slightly higher interest expense expectation.

Negative or equivalent outlook (2/9 firms or 22.2%) – The bearish firm is concerned about the macroeconomic challenges and uncertainties in which Genuine Parts operates. The company is exposed to weather as well as currency headwinds that affected results and may continue to do so.

Positive or equivalent outlook (1/9 firms or 11.1%) – The bullish firm continues to favor Genuine Parts’ auto strategy and positive industry fundamentals. It also expects that the Industrial segment’s growing Motion Industries, along with normalized weather conditions in NAPA and the acquisition of Alliance Automotive Group, will help the company to drive profit margins in 2018.

Apr 10, 2018

© Copyright 2018, Zacks Investment Research. All Rights Reserved. Overview

Based in Atlanta, GA., 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 through the following segments: Automotive Parts, Industrial Parts, Office Products, and Electrical/Electronic Materials. In 2017, Automotive Parts, Industrial Parts, Business Products and Electrical/Electronic Materials accounted for 53%, 30%, 12% and 5% of total sales, respectively.

The Automotive Parts segment distributes products through its NAPA distribution centers located across the U.S. In 2017, the company operated 57 domestic NAPA automotive parts distribution centers in 41 states and approximately 1,100 domestic NAPA auto parts stores in 45 states.

The Industrial Parts segment, which operates through a wholly-owned subsidiary, Motion Industries, distributed over 275,000 different items through its 498 branches, 14 distribution centers and 43 service centers as of 2017. Motion Industries' rapid-delivery model provides customized products and technical expertise to customers in a just-in-time manner, enabling clients to reduce production costs and free- working capital.

The Business Products segment operates through its wholly-owned subsidiary, S.P. Richards Company. It distributed over 98,000 items to more than 9,700 resellers and distributors in the United States and Canada through a network of 55 distribution centers as of Dec 31, 2017.

The Electrical/Electronic Materials segment operates through a wholly-owned subsidiary, EIS Inc. The segment was formed after the acquisition of EIS, an Atlanta-based distributor of electronic and electrical apparatus, in 1998. With 38 branch locations in the U.S., Puerto Rico, the Dominican Republic, Mexico and Canada, the group distributes items including wire and cable, insulating and conductive materials, assembly tools and test equipment to more than 20,000 electrical and electronics manufacturers as well as industrial assembly, specialty wire and cable markets in North America.

Key investment considerations identified by the analysts are as follows

Key Positive Arguments Key Negative Arguments  Balance sheet: Genuine Parts has a healthy . The automotive business is highly cyclical: The balance sheet and undertakes share repurchase global auto industry is highly cyclical and programs. Efficient capital deployment will boost vulnerable to sudden shifts in consumer sentiment, shareholder value. employment, interest rates and general economic  Product Mix: Genuine Parts has undertaken activities. various initiatives to boost sales and earnings, . Large merchandise inventory: The company has such as product line expansion, penetration into a large merchandise inventory. new markets and cost-saving initiatives. The  Rising competition: The company is facing company expects demand to remain strong in the competition in the automotive and non-automotive Automotive Parts segment as the average age of businesses. Price competition will likely mar vehicles on the road has risen to more than 11 revenues and earnings of Genuine Parts. years. An aging vehicle fleet increases the Moreover, unfavorable economic conditions demand for parts’ replacement. including low economic growth and high  Acquisition: Genuine Parts frequently unemployment have adversely affected the credit undertakes acquisitions to expand its business. In markets, consumer and business confidence as the near term, the company is targeting smaller- well as commodity prices. This uncertain economic sized companies with annual revenues of $25- situation is a challenge for Genuine Parts. $150 million.

Further information on the company is available at http://www.genpt.com .

Zacks Investment Research Page 2 www.zackspro.com Note: The company’s fiscal year coincides with the calendar year. Apr 10, 2018

Long-Term Growth

Genuine Parts frequently undertakes acquisitions to expand the business. The company is targeting smaller-sized companies with annual revenues of $25-$150 million. In 2017, Genuine Parts acquired one company in the Electrical/Electronic Materials Group, two in the Industrial Group and 12 in the Automotive Parts Group. The company invested $1.33 billion toward these acquisitions.

In April 2017, the company acquired 35% stake in Inenco Group, a leading industrial distributor in Australasia, for $72.1 million. Inenco Group generates roughly $325 annual revenues. Genuine Parts has an option to purchase the remaining 65% at a later date, subject to certain conditions. The company has acquired Merle's Automotive Supply. Merle’s acquisition will contribute nearly $45 million in its annual revenues. The company also acquired Empire Wire and Supply, a leading custom cabling and automation solutions distributor. Empire is expected to generate revenues of roughly $65 million annually.

Later in November 2017, Genuine Parts reported that it has completed the acquisition of Alliance Automotive Group (“AAG”) for a total price of roughly $2 billion. The acquired company contributed 1.7% to total sales in 2017. The buyout will enable Genuine Parts to enter the European markets through AAG’s large chain of stores and its geographical presence across the continent.

Genuine Parts focuses on returning value to shareholders through share repurchases and dividend payments. As of Dec 31, 2017, it repurchased 1.9 million shares and has approximately 17.4 million shares outstanding under the repurchase program. In February 2018, the company announced a 7% increase in quarterly dividend to 72 cents per share. This increase marks the 62nd consecutive year of dividend hike by Genuine Parts. Efficient capital deployment will boost shareholder value.

The firms are confident of the company’s future performance, given its strong financial position and active share repurchase program. Moreover, these appreciate its efficient managerial execution and consistent and sustainable revenues, earnings and cash flow.

The firms also foresee favorable trends in the auto parts business, which are expected to create potential opportunities for the company in the future.

Apr 10, 2018

Target Price/Valuation

Provided below is a summary of target price/valuation as compiled by Zacks Digest:

Rating Distribution Positive 11.1% Neutral 66.7% Negative 22.2% Avg. Target Price $95.83 ↑ Digest High $107↑ Digest Low $80↓ Upside from Current 6% No. of Analysts with Target Price/Total 6/9

Zacks Investment Research Page 3 www.zackspro.com Risks to the target price may arise primarily from higher product prices, adverse weather conditions in areas of store concentration, acquisitions, slow sales growth, deterioration of the present economic condition, industrial slowdown, intense competition from aftermarket retailers, and a decline in the industrial and office products distribution businesses. Apr 10, 2018

Recent Events

On Feb 20, 2018, Genuine Parts declared a quarterly dividend of 72 cents per common share, paid on Apr 2, 2018, to shareholders of record as of Mar 9, 2018.

On Feb 20, 2018, Genuine Parts reported adjusted earnings of $1.12 per share for 4Q17, higher than $1.02 recorded a year ago. Also, the bottom line surpassed the Zacks Consensus Estimate of $1.11. The company recorded net income of $108.2 million in 4Q17, down from $152.5 million in the prior-year quarter.

Revenues

Genuine Parts reported net sales of $4.21 billion in 4Q17, up 11.3% from $3.8 billion recorded in 4Q16. The top line surpassed the Zacks Consensus Estimate of $4.09 billion. The increase in total sales is owing to growth in the company’s automotive, industrial and electrical businesses, partly offset by the decline in Business Products Group. Automotive Parts and Electrical segments were the best performers out of the three.

Segment Details

Automotive Parts Group: Revenues at the Automotive Parts segment improved 16.7% to $2.3 billion from the year-ago level of $1.9 billion.

Industrial Parts Group: Revenues in this segment rose 7.4% to $1.24 billion from $1.15 billion in 4Q16.

Business Products Group: S. P. Richards or the Business Products segment’s revenues declined 2.2% to $466 million from $475 million recorded in 4Q16.

Electrical/Electronic Materials Group: Revenues at this segment gained 8.9% to $193 million from $177 million in 4Q16.

Full-Year 2017

Consolidated revenues rose to $$16.3 billion, up from $15.3 billion in the prior year.

Outlook

For FY17, Genuine Parts reiterated its sales increase to be 12-13%. The bullish firms believe that Genuine Parts is poised to benefit from various initiatives undertaken to boost sales, such as product line expansion and penetration into new markets. The company’s results are also likely to benefit from the acquisitions undertaken.

According to the firms, rising demand in the auto business will boost the Automotive Parts segment’s results. Continued aging of the vehicle fleet, increase in vehicle population, rise in miles driven and low

Zacks Investment Research Page 4 www.zackspro.com gas price will have a favorable impact on the company’s results. However, the firms are apprehensive about sluggishness in the Industrial and Electrical business due to negative currency impacts

Margins

Genuine Parts’ cost of goods sold was $2.8 billion in 4Q17, up from $2.7 billion in 4Q16. While gross profit was $2.9 billion, higher than $2.6 billion recorded in 4Q16.

Selling, general and administrative expenses rose to $1 billion from $856 million a year ago. Genuine Parts’ operating expenses totaled $1.06 billion in 4Q17 compared with $895 million in 4Q16. Its total operating profit slumped to $313 million from $276 million in 4Q16.

Segment Details

Automotive Parts Group: Operating profit increased to $183.2 million in 4Q17 from $160 million a year ago. Operating margin was 4.4% in 4Q17, up from 4.2% in the year-ago quarter.

Industrial Parts Group: Operating profit fell to $102 million from $81 million a year ago while operating margin was 2.4%, up from 2.1% in 4Q16.

Business Products Group: Operating profit fell to $13.7 million from $20 million a year ago. Operating margin was 0.3% in 4Q17, down from 0.53% in the year-ago quarter.

Electrical/Electronic Materials Group: The segment’s operating profit decreased to $13.5 million from $15.4 million in the year-ago quarter. Operating margin was 0.3% in 4Q17, down from 0.4% in the year- ago quarter.

Full-Year 2017

Genuine Parts cost of goods sold increased to $11.4 billion from $10.7 billion in FY16.

Selling, general and administrative expenses grew to $3.7 billion from $3.4 billion in FY16. Genuine Parts’ operating expenses totaled $3.9 billion in FY17 compared with $3.5 billion in FY16. Its total operating profit slumped to $1.3 billion from $1.2 billion in FY16.

Outlook

According to the firms, margins can improve owing to the cost-cutting strategies undertaken by the company.

Provided below is a summary of margins as compiled by Zacks Research Digest:

Margin 4Q16A FY16A 4Q17A 2017A 1Q18A 2018E 2019E 2020E Operating 7.3% 8% 7.4%↑ 7.7%↑ 7.3% 7.8% 7.8% Pre-Tax 6.3% 7% 6%↓ 6.5%↑ 5.9% 6.1% 6.1% Net 4% 4.5% 4.1%↑ 4.3%↑ 4.3% 4.5% 4.5% 4%

Please refer to the Zacks Research Digest spreadsheet on Genuine Parts for more details on margins.

Zacks Investment Research Page 5 www.zackspro.com Earnings per Share

Genuine Parts reported adjusted earnings per share of $1.12 in 4Q17, up 9.8% from the year-ago quarter. The bottom line surpassed the Zacks Consensus Estimate of $1.11.

The company recorded net income of $108.2 million in 4Q17, down from $152.5 million in the prior-year quarter.

Full-Year 2017

Genuine Parts reported adjusted earnings of $4.18 per share in FY17, down from $4.59 earned in FY16.

Outlook

For FY17, Genuine Parts projects its adjusted EPS of $5.6-$5.75 per share, which includes the benefits from AAG’s full-year operations and roughly $80-$90 million in lower income taxes.

Provided below is a summary of EPS as compiled by the Zacks Research Digest:

EPS 4Q16A FY16A 4Q17A 2017A 1Q18A 2018E 2019E 2020E Digest High $1.02 $4.6 $1.19↑ $4.71↑ $1.33 $5.85↑ $6.45↓ $6.8 Digest Low $1.02 $4.59 $1.19↑ $4.2↓ $1.33 $5.63↑ $5.85↓ $6.8 Digest Avg. $1.02 $4.59 $1.19↑ $4.46↓ $1.33 $5.74↑ $6.15↑ $6.8 YoY Growth -4.3% -0.7% 16.7%↑ -3%↓ 23.1% 28.8%↑ 7.1%↓ 10.6% QoQ Growth -17.7% 2.6%↑ 11.8% Note: Blank cells indicate that none of the brokers have provided estimates

Highlights from the EPS table are as follows:

 For FY18, earnings estimates range from $5.85 to $5.63 per share with an average of $5.74 (↑ from previous estimates of $5.25).

 For FY19, earnings estimates range from $5.85 to $6.45 per share with an average of $6.15 (↑ from previous estimates of $5.54).

 For FY20, earnings estimates is $6.8.

Please refer to the Zacks Research Digest spreadsheet on Genuine Parts for more details on EPS estimates.

Apr 10, 2018

Analyst Gargi Dam Kanunjna Copy Editor Sreya Mukherjee Content Ed. Sanjoy De Lead Analyst Sanjoy De QCA Anindya Barman No. of brokers reported/Total brokers 6/9 Reason for Update 4Q17 & FY17 Earnings Update

Zacks Investment Research Page 6 www.zackspro.com