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Standard Motor Stock Down 20% YTD: What Should Investors Do?
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Shares of Standard Motor Products, Inc. (SMP - Free Report) , one of the leading manufacturers, distributors and marketers of premium automotive replacement parts, have plunged 19.7% year to date (YTD), underperforming the industry as well as its peers like Dorman Products, Inc. (DORM - Free Report) and Douglas Dynamics, Inc. (PLOW - Free Report) .
YTD Price Comparison
Image Source: Zacks Investment Research
Standard Motor thrives on sustained demand for automotive parts and acquisition and balance sheet strength. However, rising capital expenditure and inflation on raw material costs, labor and transportation expenses cloud its prospects.
The company’s shares have witnessed a double-digit percentage dip YTD. Should you buy it, or is it a risky bet? Let's find out.
Factors Driving Standard Motor’s Growth
Sustainable Demand for Automotive Parts: The aftermarket is experiencing positive fundamental trends, driven by factors like a growing and aging vehicle population, a resurgence in historical driving mileage and the high cost of new vehicles. These trends are expected to sustain ongoing demand for automotive parts, particularly in non-discretionary categories like those offered by Standard Motor. For 2024, the company now expects sales growth to be low- to mid-single digit compared with the previous forecast of flat to low-single digit.
Acquisition Strength: The impending acquisition of Nissens, expected to close by the end of 2024, will help SMP expand its geographic presence and establish a significant global growth platform. Nissens has annual revenues of about $260 million with a mid-teens EBITDA margin.
Cost Containment Effort: To address cost pressures, SMP launched an early retirement program in the second quarter. The program is expected to yield $10 million in annualized savings once fully implemented. One-time severance costs are approximately $6 million, with $2.6 million incurred in the second quarter and $3.1 million expected in the second half of 2024.
Potential Enhancement in Capacity & Deliveries: The company has successfully initiated the first phase of shipments from its new distribution center (DC) and is optimistic about the anticipated benefits upon full implementation. This expansion will offer SMP increased capacity to support future growth, reduce risk through a multi-point distribution strategy, and enhance product delivery times in specific geographical areas.
Balance Sheet Strength and Investor-Friendly Moves: Standard Motor’s long-term debt-to-capital ratio of 0.24 is lower than the industry’s 0.35, giving it enough financial flexibility to tap into growth opportunities. In 2023, net cash provided by operating activity totaled $144.3 million compared with net cash used by operating activity of $27.5 million in 2022. The company repurchased $10.4 million of shares in the first half of 2024. It increased dividends three times in the last five years, with an annualized growth of 5.38%.
What’s Dragging SMP Stock Down?
While the above-mentioned tailwinds bode well for Standard Motors, the company is grappling with near-term challenges. As the automotive industry shifts from internal combustion engines to electric vehicles, Standard Motor faces rising R&D and capital expenditure costs. Additionally, the company has experienced rising SG&A expenses as a percentage of revenues, which climbed to 21.5% in the last reported quarter due to inflation and factoring programs.
What Do SMP’s Estimates Indicate?
The Zacks Consensus Estimate for SMP’s 2024 sales and EPS estimate implies year-over-year growth of 4.39% and 3.08%, respectively. The Zacks Consensus Estimate for the company’s 2025 sales and EPS estimate implies year-over-year growth of 3.08% and 13.95%, respectively. In the last seven days, the company has seen its 2024 EPS estimates rise. Meanwhile, estimates for 2025 EPS have moved down.
Image Source: Zacks Investment Research
Standard Motor Stock Valuation
SMP is trading at a discount compared with the Zacks Automotive - Replacement Parts industry. Its forward 12-month Price/Sales of 0.48X is lower than the industry’s 0.75X and its own five-year median of 0.73X.
Image Source: Zacks Investment Research
Conclusion
Although this Zacks Rank #3 (Hold) company grapples with near-term headwinds like rising expenditure on emerging technologies, investors who already hold shares should maintain their position, as the company’s fundamental strengths and growth drivers remain solid. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Standard Motor Stock Down 20% YTD: What Should Investors Do?
Shares of Standard Motor Products, Inc. (SMP - Free Report) , one of the leading manufacturers, distributors and marketers of premium automotive replacement parts, have plunged 19.7% year to date (YTD), underperforming the industry as well as its peers like Dorman Products, Inc. (DORM - Free Report) and Douglas Dynamics, Inc. (PLOW - Free Report) .
YTD Price Comparison
Image Source: Zacks Investment Research
Standard Motor thrives on sustained demand for automotive parts and acquisition and balance sheet strength. However, rising capital expenditure and inflation on raw material costs, labor and transportation expenses cloud its prospects.
The company’s shares have witnessed a double-digit percentage dip YTD. Should you buy it, or is it a risky bet? Let's find out.
Factors Driving Standard Motor’s Growth
Sustainable Demand for Automotive Parts: The aftermarket is experiencing positive fundamental trends, driven by factors like a growing and aging vehicle population, a resurgence in historical driving mileage and the high cost of new vehicles. These trends are expected to sustain ongoing demand for automotive parts, particularly in non-discretionary categories like those offered by Standard Motor. For 2024, the company now expects sales growth to be low- to mid-single digit compared with the previous forecast of flat to low-single digit.
Acquisition Strength: The impending acquisition of Nissens, expected to close by the end of 2024, will help SMP expand its geographic presence and establish a significant global growth platform. Nissens has annual revenues of about $260 million with a mid-teens EBITDA margin.
Cost Containment Effort: To address cost pressures, SMP launched an early retirement program in the second quarter. The program is expected to yield $10 million in annualized savings once fully implemented. One-time severance costs are approximately $6 million, with $2.6 million incurred in the second quarter and $3.1 million expected in the second half of 2024.
Potential Enhancement in Capacity & Deliveries: The company has successfully initiated the first phase of shipments from its new distribution center (DC) and is optimistic about the anticipated benefits upon full implementation. This expansion will offer SMP increased capacity to support future growth, reduce risk through a multi-point distribution strategy, and enhance product delivery times in specific geographical areas.
Balance Sheet Strength and Investor-Friendly Moves: Standard Motor’s long-term debt-to-capital ratio of 0.24 is lower than the industry’s 0.35, giving it enough financial flexibility to tap into growth opportunities. In 2023, net cash provided by operating activity totaled $144.3 million compared with net cash used by operating activity of $27.5 million in 2022. The company repurchased $10.4 million of shares in the first half of 2024. It increased dividends three times in the last five years, with an annualized growth of 5.38%.
What’s Dragging SMP Stock Down?
While the above-mentioned tailwinds bode well for Standard Motors, the company is grappling with near-term challenges. As the automotive industry shifts from internal combustion engines to electric vehicles, Standard Motor faces rising R&D and capital expenditure costs. Additionally, the company has experienced rising SG&A expenses as a percentage of revenues, which climbed to 21.5% in the last reported quarter due to inflation and factoring programs.
What Do SMP’s Estimates Indicate?
The Zacks Consensus Estimate for SMP’s 2024 sales and EPS estimate implies year-over-year growth of 4.39% and 3.08%, respectively. The Zacks Consensus Estimate for the company’s 2025 sales and EPS estimate implies year-over-year growth of 3.08% and 13.95%, respectively. In the last seven days, the company has seen its 2024 EPS estimates rise. Meanwhile, estimates for 2025 EPS have moved down.
Image Source: Zacks Investment Research
Standard Motor Stock Valuation
SMP is trading at a discount compared with the Zacks Automotive - Replacement Parts industry. Its forward 12-month Price/Sales of 0.48X is lower than the industry’s 0.75X and its own five-year median of 0.73X.
Image Source: Zacks Investment Research
Conclusion
Although this Zacks Rank #3 (Hold) company grapples with near-term headwinds like rising expenditure on emerging technologies, investors who already hold shares should maintain their position, as the company’s fundamental strengths and growth drivers remain solid. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.