Genuine Parts Co. credit outlook revised to negative at S&P Global due to increased leverage

Investing.com -- S&P Global Ratings has revised its outlook for Genuine Parts Co . (NYSE:GPC), an automotive aftermarket and industrial parts distributor, to negative from stable. This revision is due to the company’s soft operating performance and elevated acquisition activity in 2024, which has negatively affected its credit metrics.

S&P Global Ratings expects these performance challenges to continue in 2025, with its adjusted leverage forecasted to remain above 4x this year before improving to the mid-3x area in 2026. The negative outlook reflects the risk that the company’s leverage will remain above the downgrade threshold of 4x beyond 2025 due to heightened performance risks and execution challenges.

In 2024, GPC’s credit metrics deteriorated, with S&P Global Ratings-adjusted leverage rising to 4.5x as of December 31, 2024. This was due to increased acquisition activity and restructuring costs. The company acquired over 500 stores in 2024, funded in part by balance sheet cash and funded debt. Cash used for acquisitions exceeded $1 billion in 2024, compared to $306 million in the previous year. S&P Global Ratings expects acquisition activity to moderate and be around $300 million annually.

GPC’s global automotive comparable sales were flat in 2024, impacted by high interest rates and inflation pressures. The company’s industrial segment experienced a 2.1% decline in sales due to weaknesses in global manufacturing and a reduction in capital spending projects by manufacturers. These risks are expected to continue in 2025, especially during the first half of the year. S&P Global Ratings forecasts sales growth of around 2% in 2025, driven by low single-digit inflationary pricing and flat to modestly positive comparable sales.

The company anticipates restructuring expenses of $150 million-$180 million in 2025, down modestly from the $231 million incurred in 2024. This is part of GPC’s efforts to improve efficiency amid a softer demand environment. The company’s focus on streamlining operations across back-office functions, supply chain, and other facilities is expected to lead to savings and operational efficiency over the next two years. S&P Global Ratings forecasts S&P Global Ratings-adjusted EBITDA margin to modestly improve to 9.9% in 2025 from 9.1% in 2024, as a result of anticipated efficiency in operations and better gross margins.

S&P Global Ratings believes GPC is committed to maintaining its financial policy, targeting a company-calculated debt to EBITDA of 2.0x-2.5x. In 2025, GPC is expected to generate nearly $1.3 billion in operating cash flow and $830 million in free cash flow, with $450 million in capital expenditures and nearly $600 million in dividends. The company is expected to continue consolidating its independent operator network but will likely spend significantly less than the $1 billion outlay in 2024.

GPC’s operations are expected to benefit from relatively stable long-term industry fundamentals in vehicle and industrial maintenance spending. The company’s global scale, distribution capabilities, and the NAPA brand recognition are seen as providing opportunities for revenue diversification and growth, particularly in international markets.

The negative outlook reflects GPC’s current elevated leverage and the risk that operating challenges and macroeconomic headwinds could persist over the next 12-24 months. S&P Global Ratings could lower its rating if it expects S&P Global Ratings-adjusted leverage to remain above 4x. This could occur if GPC’s underperformance continues beyond 2025 with muted sales growth relative to peers and limited improvement in profitability.

S&P Global Ratings could revise the outlook to stable if GPC’s performance and credit metrics improve, leading to an expectation that S&P Global Ratings-adjusted leverage will remain below 4x on a sustained basis. This would require sales growth and margin improvement in line with projections, supporting higher earnings and cash flow.

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