Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Genuine Parts Company (GPC) fares in the ModernGraham valuation model.
Defensive Investor - must pass at least six of the following seven tests: Score = 4/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
- Moderate PEmg ratio - PEmg is less than 20 - FAIL
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
Valuation Summary
Key Data:
| Recent Price | $86.79 |
| MG Value | $79.57 |
| MG Opinion | Fairly Valued |
| Value Based on 3% Growth | $55.87 |
| Value Based on 0% Growth | $32.75 |
| Market Implied Growth Rate | 7.01% |
| NCAV | $5.79 |
| PEmg | 22.52 |
| Current Ratio | 1.64 |
| PB Ratio | 3.98 |
Balance Sheet - 12/31/2013
| Current Assets | $5,221,500,000 |
| Current Liabilities | $3,183,000,000 |
| Total Debt | $500,000,000 |
| Total Assets | $7,680,300,000 |
| Intangible Assets | $1,289,400,000 |
| Total Liabilities | $4,331,200,000 |
| Outstanding Shares | 153,770,000 |
Earnings Per Share
| 2013 | $4.40 |
| 2012 | $4.14 |
| 2011 | $3.58 |
| 2010 | $3.00 |
| 2009 | $2.50 |
| 2008 | $2.92 |
| 2007 | $2.98 |
| 2006 | $2.76 |
| 2005 | $2.50 |
| 2004 | $2.25 |
| 2003 | $2.03 |
| 2002 | $2.10 |
Earnings Per Share - ModernGraham
| 2013 | $3.85 |
| 2012 | $3.46 |
| 2011 | $3.08 |
| 2010 | $2.83 |
| 2009 | $2.74 |
| 2008 | $2.80 |
Dividend History
GPC Dividend data by YCharts
Conclusion:
Genuine Parts Company is suitable for the Enterprising Investor but not the Defensive Investor. The company fails the Defensive Investor's requirements by having a low current ratio and high PEmg and PB ratios. However, the company passes all of the Enterprising Investor's requirements, and this investor type may feel comfortable proceeding with further research into the company. From a valuation perspective, the company appears to be fairly valued. The company's EPSmg (normalized earnings) have grown from $2.74 in 2009 to $3.85 for 2013, and this level of growth supports the market's implied estimate of growth of 7.01%. As a result, the ModernGraham valuation model returns an estimate of intrinsic value that is within a margin of safety in relation to the current price.
Disclaimer: The author did not hold a position in Genuine Parts Company (GPC) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
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