This Parts Company Looks Genuinely Good

Replacement-parts maker Genuine Parts (NYS: GPC) delivered sound second-quarter results, reporting a 22% jump in quarterly profits. Its industry is doing well, but is that bad news as the competition heats up? And what about the ongoing effects of the turbulent economy?

Revenues for the quarter climbed 12% year on year to $3.2 billion. Although all four segments -- Automotive, Industrial, Office Products, and Electrical/Electronic -- performed reasonably well, sales growth was primarily driven by the strength in industrial and electrical segments.

Acquisitions certainly added to sales, but more importantly, ongoing operations generated heavy returns. The electrical segment in particular benefited from favorable copper pricing.

The office-product line did show a rather tepid performance, with sales increasing just about 4% year on year. But since this is the fourth consecutive quarter reporting a growth in office supplies and related segments, we see indications that an improving trend is setting in.

Meanwhile, the automotive sector's sales are up 9% this quarter, fueled by higher demand. Profits were beefy enough, with net income increasing by 22% to $151.8 million and EPS rising to $0.96 this quarter.

Cashing in
The capital position looks good. The company ended the quarter with cash and cash equivalents of $517 million, up by $105 million from the year-ago quarter. Cash levels have improved on the back of increased earnings, proper asset management, and cost-reduction strategies. Inventories also went up 4% year on year to $2.25 billion.

Management seems positive about generating healthy cash flows for the rest of the year. Though no new debt was borrowed this quarter, there is already $500 million worth of debt on the company's balance sheet. Although the current ratio has declined to 2.2 from the year-ago quarter's 2.7, it still looks pretty healthy. The debt-to-equity ratio has declined to 17.1% from 18.7%, which is again positive for the company.

Weathering industry trends
While the general health of the industry is improving, peers may take competition to a completely new level. Competitor Advance Auto Parts (NYS: AAP) didn't post a great first quarter, but gross profit was high and the opening of 37 new stores indicates that the company expects to see an improving trend in sales.

At the same time, AutoZone (NYS: AZO) is maneuvering just as aggressively after posting healthy third-quarter profits and opening 43 new stores in the United States. So the possibility of seeing a sales improvement in this sector seems high.

The Foolish bottom line
Although the company seems well positioned to deal with economic turbulence, Fools should expect higher gasoline prices, a slowdown in consumer spending, and unemployment to affect both the top and bottom lines. I would suggest that investors take it easy with this stock, which otherwise seems to be worth a look.

At the time thisarticle was published Fool contributor Debarati Bose owns no shares of any of the companies mentioned in the article.Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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