hi I'm Jimmy in this video we're looking at the genuine parts company ticker
symbol GPC this video is part of our new dividend aristocrat series where we're
analyzing each of the companies within the dividend aristocrats ETF the goal
with this series is to see if we can find great dividend paying stocks that
have a good chance of paying reliable dividends in the years to come
ultimately getting us closer to our goal of financial freedom
okay so let's dive into genuine Parks's business then we'll try to value GPC
stock using both a dividend discount model and a discounted free cash flow
valuation technique so GPC sells automotive and industrial replacement
parts they have office products that they sell and electronic materials they
operate mostly in the United States Canada and Mexico although they do have
some international presence now they've recently made an acquisition where
they're trying to expand their European presence and that could really help grow
their international presence but for now it's mostly just in the u.s. although
their Alliance automotive acquisition should help them because the European
market is very segmented compared to the consolidation that companies like GPC
have created in the United States so they really have the opportunity to
consolidate throughout Europe and that could one day help their business and
really help their economies of scale and their growth okay simple enough so these
are their segments broken down by 2018 revenue and as we can see the majority
of this revenue comes from their automotive segment and when we switch
over to total revenue going back to 2009 well we can see that revenue is growing
they've grown fairly steadily since 2009 now there was a bit of hesitation right
there during those three years or so but once again since then it started moving
higher now if we were to add gross profit and net income to this chart well
we can see that each of them have grown roughly in line with revenue now one of
the things that jump out to me is how small the net income number is relative
to both girls profit and total revenue now this shouldn't be terribly
surprising because most retail businesses tend to have very small
margins since a lower price often is one of the
only ways to get to draw in more customers so when we want to look at
just the margins this is net income margins and we can see that broadly
speaking net income margins have stuck between four and five percent since
about 2011 now I'm including analyst estimates in here
they're the parts that are highlighted in the green bars okay now leave the
idea of the numbers behind the business now let's look quickly at one of the key
drivers to the automotive replacement parts industry in general and then we'll
try to come up the fair value for GPC stock so as we could guess one of the
main drivers of the auto parts industry is how old the average car is at least
in the United States which is where most of the revenue comes for right now
luckily there's a company called RL Polk that does that exact kind of research
this is a chart of the average age of light passenger vehicles in the United
States and as we could see the average age has been climbing quite consistently
for many years now this is likely this likely has a lot to do with the fact
that cars have the quality of cars has gradually improved and cars can last
longer now than they used to many years ago but the older cars become the more
they need to be maintained which is likely to lead to at least a sustainable
business model for GPC and the important part for us is the sustainability of
their dividend as dividend investors so this is GP sees dividend per share going
back to 2002 and as we could see analysts are expecting for that growth
to continue once again the other green bars now I think it's important remember
that this shouldn't be much of a surprise for any of the companies that
were review in this series because one of the rules of the dividend aristocrats
ETF is that all the companies must raise their dividend every year for at least
twenty five consecutive years to be in the index so there shouldn't be too much
of a surprise for us okay now let's see if we can come up with a fair value for
GPC stock so right now GPC has a dividend yield of almost three percent
and over the next 12 months it's estimated the GPC will pay out about
three dollars and five cents per share in dividends and if we would assume that
their dividend growth rate is going to
be five percent per year which is about
their average over the past few years well that would imply that the fair
value of the stock would be about 107 dollars per share and given that GPC is
trading at about 107 I think it 116 change right now well that would mean
that their stock is fairly valued at the current level now if you're curious
about how we did this calculation actually did a video called
don't overpay for dividend stocks I've got a link in the description below
sort of walk through how this is done and how to choose the different numbers
well let's not stop there let's see if we can value GPC stock using the
discounted cash flow valuation method so this is what those numbers look like now
I'm gonna run through these numbers super quick but once again I have I
created a video on how to do that that's a longer video walking through every
component of this where you can find it how I can calculate it I've got a link
in the description below I even have an Excel spreadsheet like a template that I
created if you want that link below but basically here's what we have this is
projected free cash flow I simply took that from analyst estimates then I used
two required rate of return of eight and a half percent that's generally about
where I want to be in line as far best on the risk of the company personally
that's one of my personal favorites although once again in that video I walk
through some ways how you can calculate that then I use the perpetual growth
rate of 2.5 percent this is generally a fair number to use somewhere in that
area maybe three and a half percent but I like to be a bit more conservative I
use two and a half percent because that's likely to be in line with about
the average growth of GDP over time using those numbers we end up with a
fair value of GPC stock to be about ninety nine dollars per share well as I
mentioned a moment ago GPC is trading at about one hundred and six hundred and
seven dollars per share so it seems that according to both this and the dividend
discount model that GPC stock is at least fairly valued right now possibly
slightly overvalued depending on which model you believe so I think it makes
sense to add GPC to a watchlist until hopefully we get some sort of market
pullback we get an opportunity to get in this one at a lower price because
historically GPC has done quite well in recession so for worried about a stock
market crash GPC could very well be a good play even a days even if our fair
if it's about fairly valued right now that might make a lot of sense if we're
overly concerned about a stock market crash historically this industry has
done very well in market pull backs but personally I like to add a margin of
safety to my calculations to help me determine where to buy the stock now if
you're curious about how to identify where to buy a stock this could be a
good next video to watch or I walk through the margin of safety concept and
how to come up with that for each of your own company analysis so thank you
so much for stick with me all the way into the video I really appreciate it
I hope you found this interesting thanks and I'll see in the next video