While investors continue chasing artificial-intelligence stocks, value investor Seth Klarman appears to be making a very different bet.
Klarman’s Baupost Group increased its position in Genuine Parts Company (NYSE: GPC) by 89% in the second quarter, ending June with 2.82 million shares worth about $332.3 million, according to its latest portfolio disclosure.
A Breakup That Could Unlock Value
Genuine Parts earlier this year announced that it plans to separate its Global Automotive and Global Industrial businesses to increase focus and shareholder value.
Bulls say the two businesses could ultimately be worth more as separate companies than they are under one corporate structure.
Motion Is Showing Strong Momentum
The Industrial business, which includes Motion, currently looks like the stronger performer.
In the second quarter, Industrial sales increased about 7% year over year, while EBITDA rose nearly 10% to $316 million. EBITDA margin expanded 30 basis points to 13.1%. Core maintenance, repair and operations sales increased about 7%, while project-based sales climbed roughly 9%. The company also reported growth in 11 of its 14 industrial end markets.
That combination could make Global Industrial particularly interesting once it becomes a standalone company. Investors will be able to evaluate the business independently rather than alongside Genuine Parts’ very different automotive operations.
Automotive Still Has Value
The Automotive business should not be overlooked.
Genuine Parts operates the NAPA automotive-parts business and has a large distribution and independent-store network across its markets. In the second quarter, North American Automotive sales increased about 4%, while comparable sales rose 2.6%.
Management is also working to improve the economics of its independent-store network through initiatives involving sales, pricing, inventory, operations and technology. GPC’s core brands include NAPA, Repco, and UAP, and the company holds a strong market position. The stock has 70 consecutive years of dividend increases under its belt.
Risks
The biggest risk is that GPC’s planned separation fails to deliver the value investors expect. Genuine Parts will lose some of the economies of scale and shared corporate infrastructure that come from operating Automotive and Industrial together, while both businesses will have to absorb higher standalone costs.
While we acknowledge the risk and potential of GPC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than GPC and that has 10,000% upside potential, check out our report about the cheapest AI stock.
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