In this piece, I evaluated two auto parts stocks, Genuine Parts Company (GPC) and QuantumScape Corporation (QS), to determine a better investment. Based on a fundamental comparison of these stocks, I believe GPC is the better buy for the reasons explained throughout this article.
Although it is closely linked to the automobile industry, the auto parts sector is not entirely dependent on new vehicles sale. Last year, the automobile industry struggled as new vehicle sales took a hit due to supply chain challenges, high inflation, and rising interest rates.
However, the auto parts industry was relatively unaffected. This makes the sector attractive from an investment standpoint as it can remain insulated against the volatility caused by economic cycles.
According to Cox Automotive, new-vehicle sales for 2023 are forecasted to increase 3% year-over-year to 14.20 million units. Although auto parts companies only partially rely on new-vehicle sales for their growth, the increase in new-vehicle sales is expected to benefit the industry.
Moreover, with the increasing use of advanced technology and components inside newer vehicles, the auto parts industry is expected to grow substantially in the long term. The global automotive OEM market size is expected to grow at a CAGR of 4.2% to hit $46 billion by 2030. In addition, the global automotive aftermarket industry’s revenue is expected to grow at a CAGR of 4% to reach $589.01 billion by 2030.
GPC topped the consensus EPS estimate by 3.9% in the second quarter. On the other hand, its revenue was 0.7% below the consensus estimate. Meanwhile, QS’ EPS fell short of analyst estimates by 26.3%.
GPC’s Chairman and CEO Paul Donahue said, “We are pleased to report another solid quarter, which includes record sales and double-digit adjusted earnings growth. Our second quarter performance, once again, highlights the value and benefit of our global Automotive and Industrial business mix and geographic diversity, which we believe are competitive advantages that differentiate GPC in the marketplace.”
For fiscal 2023, GPC expects its total sales growth to be between 4% and 6%. The company upgraded its outlook for adjusted EPS from $8.95 to $9.10 to $9.15 to $9.30. Its net cash flow from operating activities is expected to come between $1.30 billion and $1.40 billion. Also, its free cash flow will likely be between $900 million and $1 billion.
QS expects capital expenditures of between $100 million and $150 million in fiscal 2023. It expects its cash operating expenses to be between $225 million to $275 million. The company believes its cash runway will extend into the second half of 2025.
When it comes to price performance, QS is the clear winner. QS’ stock has gained 33.7% in price over the past month compared to GPC’s 4.1% gain. In addition, QS’ stock has gained 79.7% year-to-date, compared to GPC’s 3.1% decline.
Here are the reasons I think GPC could perform better in the near term:
Recent Financial Results
GPC’s net sales for the second quarter ended June 30, 2023, increased 5.6% year-over-year to $5.92 billion. Its adjusted net income rose 10% over the prior-year quarter to $344.49 million. The company’s gross profit increased 8.9% year-over-year to $2.13 billion. Its adjusted EPS came in at $2.44, representing an increase of 10.9% year-over-year.
For the fiscal first quarter ended March 31, 2023, QS’ total operating expenses rose 21.3% over the prior-year quarter to $109.98 million. Its net loss widened 5.8% year-over-year to $104.63 million. The company’s loss per share widened 4.3% year-over-year to $0.24.
Its net cash used in operating activities rose 31.5% year-over-year to $62.32 million. Also, its adjusted EBITDA loss widened 8.8% year-over-year to $62.48 million.
Expected Financial Performance
Analysts expect GPC’s EPS for fiscal 2023 and 2024 to increase 10.2% and 8.3% year-over-year to $9.19 and $9.95. Its fiscal 2023 and 2024 revenue is expected to increase 6% and 4.9% year-over-year to $23.42 billion and $24.55 billion. Its EPS and revenue for the September 30, 2023 quarter are expected to increase 7.1% and 5% year-over-year to $2.39 and $5.96 billion, respectively.
For fiscal 2023 and 2024, QS’ EPS is expected to remain negative. Additionally, its EPS for the quarter ended June 30, 2023, is expected to remain negative.
Profitability
GPC is more profitable, with a Return on Assets and Return on Equity of 7.57% and 32.88%, compared to QS’ negative 27.98% and 30.49%, respectively. Also, GPC’s Return on Total Capital of 13.45% compares to QS’ negative 18.33%.
POWR Ratings
GPC has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system. On the other hand, QS has an overall rating of F, translating to a Strong Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. GPC has a B grade for Quality, in sync with its high profitability. QS’ poor profitability justifies its D grade for Quality.
It has a B grade for Sentiment, consistent with its favorable analyst estimates. On the other hand, QS’ weak analyst estimates justify its D grade for Sentiment.
Of the 60 stocks in the A-rated Auto Parts industry, GPC is ranked #14, while QS is ranked #58 in the same industry.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, and Stability. Click here to view GPC’s ratings. Get all the ratings of QS here.
The Winner
Despite the uncertain macroeconomic environment, GPC reported record sales and double-digit adjusted EPS growth. The company also raised its adjusted EPS estimates for fiscal 2023. It will benefit from the strong growth prospects of the auto parts industry.
On the other hand, QS has yet to deliver on its promise of commercializing its much-talked-about solid-state batteries, which have the potential to last longer and charge faster than lithium-ion batteries. The company looks far from becoming profitable. Moreover, QS will likely face competition as many other companies are developing solid-state batteries.
Considering these factors, GPC could be a better choice than QS.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Auto Parts industry here.
What To Do Next?
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GPC shares were trading at $155.69 per share on Friday morning, up $0.52 (+0.34%). Year-to-date, GPC has declined -9.19%, versus a 19.36% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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