John Holder, a Board member at auto parts company Genuine Parts Company (NYSE:GPC), bought 1,000 shares on December 31st at an average price of $63.03 per share. Holder had only owned 500 shares before this purchase, so it was a large percentage increase in his exposure to the company’s fortunes. Insiders should generally avoid doing this, preferring instead to diversify, and so when we see an insider purchase we take it as a sign that the insider is particularly confident in the stock. This explains why on average- though not always- insider purchases tend to be bullish signs (read more about studies on insider trading).
While many auto related companies are trading at very low earnings multiples as macro conditions have hurt the auto market, Genuine Parts Company carries a trailing P/E multiple of 16. We think this is primarily because Genuine Parts provides replacement parts, and thus benefits from consumers choosing to keep their current cars longer rather than buying new ones. Note that the stock’s beta is 0.7, so it moves with the stock market but not particularly strongly. In addition, the company provides industrial, electric, and office products; auto parts are only responsible for about half of revenue.
In the third quarter of 2012, auto parts sales were up 2% from the same period a year earlier, slightly below the revenue growth rates in the other segments of Genuine Parts’ business (industrial parts make up about a third of revenue, office products 13%, and most of the remainder is electrical or electronic equipment). With SGA expenses flat, net income rose 14%; similar increases in earnings had occurred in the first half of the year. We’ve already noted that at its current market capitalization of $10 billion, Genuine Parts Company trades at 16 times trailing earnings; the sell-side expects very modest EPS growth next year, and so the forward P/E multiple is 15. We can certainly see earnings growth converging to the lower growth rate of revenue as management runs out of ways to hold cost growth down, but with a moderate dividend yield and at least some protection from a poor auto market we can see at least the possibility of the stock turning out to be a good value.