This was a really interesting read! The breakdown of GPC’s valuation compared to ORLY really got me thinking.
If GPC trades at nearly half ORLY’s valuation but has only a slightly lower revenue growth projection, do you think the market is underestimating its long-term potential, or is there another factor keeping its valuation down? 🤔
Great analysis, and the charts really help visualize everything. Looking forward to more deep dives like this! 📊
Great question, Jonathan! I believe there are a couple of factors that justify a lower multiple versus ORLY. First, ORLY has higher gross and operating margins due to its retail business model (versus GPC's wholesale model). Second, consequently ORLY has a negative Cash Conversion Cycle due to receiving revenue COD (i.e., retail), so it ties up less working capital.
Be careful jumping into ORLY for these reasons alone though. At a 30x forward PE and 11% EPS growth, ORLY is priced to perfection, and it only takes one news item or data point to give it a big haircut.
GPC has another close peer in Grainger (GWW) based on its industrial distribution segment (38% of GPC sales). GWW is wholesale so its margin profile is a bit more in-line with GPC's.
As I mentioned in the article, I don't see GPC as undervalued here at all. However, it appears fairly valued and perhaps a consideration for a more conservative dividend investor. It does still have some work to do on its transformation. Gross margins have been increasing but I want to see operating margins improve more.
I believe there is truth to your point on the cyclicality of retail like ORLY, however GPC's industrial segment is also more sensitive to slowdowns (cyclicality).
There is certainly room for upside on any stock, but ORLY has a 2.5x PEG ratio, meaning its multiple is 2.5x its growth rate. GPC is about 1.9x which is still not the greatest but noticeably lower. With the higher PEG and P/E, ORLY has much more room to drop. To your question, I would say more of ORLY's future growth is priced in.
For GPC, I want to see them make progress on reverting to a lower SG&A margin. It recently struggled with cost inflation in this line item, but gross margins are expanding nicely. ORLY and AZO have seen the same cost increases.
Also for GPC would like to see a trough developing in European and Industrial segment weakness but as a long-term investment, GPC is fairly valued for a conservative dividend growth investor IMHO.
Very interesting read, Kris! Congratulations on the final work. I had no idea about the history of allocating 40-50% of FCF to acquisitions. A very aggressive strategy, with risks, of course.
Definitely always execution risks on acquisitions and integration. They have a long history of successful acquisitions, but it isn't as high ROIC as internal reinvestment.
They seem to generate a low teens ROIC and, while they don't explicitly report it, purchase their targets at single-digit EBITDA multiples - probably FV for industrial and wholesale business acquisitions.
Their gross margin increased consistently since their transformation of the business lines 5 years ago. Personally, I would like to see improvement now in their operating margins (i.e., SG&A margin).
I do not hold this in my portfolio but have short options at a $105 strike price (or 12.3x P/E).
This was a really interesting read! The breakdown of GPC’s valuation compared to ORLY really got me thinking.
If GPC trades at nearly half ORLY’s valuation but has only a slightly lower revenue growth projection, do you think the market is underestimating its long-term potential, or is there another factor keeping its valuation down? 🤔
Great analysis, and the charts really help visualize everything. Looking forward to more deep dives like this! 📊
Great question, Jonathan! I believe there are a couple of factors that justify a lower multiple versus ORLY. First, ORLY has higher gross and operating margins due to its retail business model (versus GPC's wholesale model). Second, consequently ORLY has a negative Cash Conversion Cycle due to receiving revenue COD (i.e., retail), so it ties up less working capital.
Be careful jumping into ORLY for these reasons alone though. At a 30x forward PE and 11% EPS growth, ORLY is priced to perfection, and it only takes one news item or data point to give it a big haircut.
GPC has another close peer in Grainger (GWW) based on its industrial distribution segment (38% of GPC sales). GWW is wholesale so its margin profile is a bit more in-line with GPC's.
As I mentioned in the article, I don't see GPC as undervalued here at all. However, it appears fairly valued and perhaps a consideration for a more conservative dividend investor. It does still have some work to do on its transformation. Gross margins have been increasing but I want to see operating margins improve more.
Thanks for the detailed breakdown!
I see how ORLY’s retail model helps with cash flow and margins, but it also seems like that could make it more sensitive to economic slowdowns.
If ORLY is priced to perfection at a 30x PE, does that mean it’s already factoring in future growth, or do you think there’s still room for upside?
Also, with GPC still working on its transformation, what specific changes would make you more confident in its operating margins improving?
Would it need to shift its business model, or is it just a matter of better cost control? Curious to hear your thoughts!🙏
I believe there is truth to your point on the cyclicality of retail like ORLY, however GPC's industrial segment is also more sensitive to slowdowns (cyclicality).
There is certainly room for upside on any stock, but ORLY has a 2.5x PEG ratio, meaning its multiple is 2.5x its growth rate. GPC is about 1.9x which is still not the greatest but noticeably lower. With the higher PEG and P/E, ORLY has much more room to drop. To your question, I would say more of ORLY's future growth is priced in.
For GPC, I want to see them make progress on reverting to a lower SG&A margin. It recently struggled with cost inflation in this line item, but gross margins are expanding nicely. ORLY and AZO have seen the same cost increases.
Also for GPC would like to see a trough developing in European and Industrial segment weakness but as a long-term investment, GPC is fairly valued for a conservative dividend growth investor IMHO.
Very interesting read, Kris! Congratulations on the final work. I had no idea about the history of allocating 40-50% of FCF to acquisitions. A very aggressive strategy, with risks, of course.
Definitely always execution risks on acquisitions and integration. They have a long history of successful acquisitions, but it isn't as high ROIC as internal reinvestment.
They seem to generate a low teens ROIC and, while they don't explicitly report it, purchase their targets at single-digit EBITDA multiples - probably FV for industrial and wholesale business acquisitions.
Their gross margin increased consistently since their transformation of the business lines 5 years ago. Personally, I would like to see improvement now in their operating margins (i.e., SG&A margin).
I do not hold this in my portfolio but have short options at a $105 strike price (or 12.3x P/E).