Standard Motor Products Inc. (SMP-NYSE)

Transcription

1 March 12, 2015 Standard Motor Products Inc. (SMP-NYSE) Current Recommendation Prior Recommendation Neutral Date of Last Change 03/12/2015 Current Price (03/11/15) $41.46 Target Price $50.00 SUMMARY DATA OUTPERFORM 52-Week High $ Week Low $33.05 One-Year Return (%) Beta 1.71 Average Daily Volume (sh) 70,658 Shares Outstanding (mil) 23 Market Capitalization ($mil) $954 Short Interest Ratio (days) 7.92 Institutional Ownership (%) 77 Insider Ownership (%) 13 Annual Cash Dividend $0.60 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 5.9 Earnings Per Share (%) 27.6 Dividend (%) 25.5 using TTM EPS 16.5 using 2015 Estimate 14.6 using 2016 Estimate 13.4 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page SUMMARY We are upgrading the recommendation on Standard Motor to Outperform from Neutral. The company reported a 16.7% rise in adjusted earnings per share to $0.49 in the fourth quarter of 2014, which surpassed the Zacks Consensus Estimate by $0.03. Standard Motor is poised to benefit from its joint venture with Gwo Yng Enterprises, its acquisition of certain assets and liabilities of Annex Manufacturing and the takeover of Pensacola Fuel Injection. The company s strong brand recognition and new initiatives are expected to have favorable impacts, going forward. In addition, the company s strong financial position has allowed it to hike its dividend by 15% and authorize an additional share repurchase program of $10 million. Risk Level * Average, Type of Stock Mid-Blend Industry Auto/Truck-Repl Zacks Industry Rank * 167 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 270 A 264 A 219 A 984 A A 273 A 257 A 218 A 980 A E 287 E 268 E 230 E 1,030 E ,081 E *Note: Revenues in 2014 do not add up to annual figure due to rounding-off. Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.42 A $0.70 A $0.79 A $0.42 A $2.32 A 2014 $0.53 A $0.76 A $0.74 A $0.49 A $2.52 A 2015 $0.58 E $0.88 E $0.88 E $0.50 E $2.84 E 2016 $3.10 E *Note: EPS in 2013 do not add up to annual figure due to rounding-off. Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Long Island City, NY-based Standard Motor Products Inc. (SMP) was founded in 1919 and is one of the leading manufacturers, distributors and marketers of automotive replacement parts in the U.S. Presently, the company has three primary operating segments Engine Management (which accounted for 72.3% of the company s sales in 2014), Temperature Control (26.4%) and All Other (1.3%). The Engine Management division manufactures ignition and emission parts, ignition wires, battery cables, fuel system parts and sensors for vehicles. The Temperature Control division manufactures and remanufactures air conditioning and heating parts, engine cooling system parts, power window accessories and windshield washer system parts. Standard Motor sells its products primarily to warehouse distributors like CARQUEST and NAPA Auto Parts, large retail chains such as Advance Auto Parts, AutoZone, CSK Auto, O Reilly Automotive, and Pep Boys, and original equipment manufacturers (OEMs). The products are sold in the U.S., Canada, Europe, Latin America and Asia. REASONS TO BUY Standard Motor has a strong financial position and promising long-term business prospects, which allows the company to deploy capital effectively. During 2014, the company repurchased 284,284 shares for $10 million, thus utilizing the total authorization approved in Feb Moreover, in Feb 2015, Standard Motor announced a 15.4% increase in quarterly dividend to $0.15 per share from the prior payout of $0.13. In addition, on Feb 25, 2015, the company s board of directors authorized the repurchase of up to an additional $10 million of its shares under the stock repurchase program. The company plans to finance the repurchase through its revolving credit facility. These capital deployment measures are expected to boost shareholder value. Standard Motor enjoys a strong competitive advantage due to its brand recognition and sizeable customer base. It distributes parts under established brand names such as Standard, BWD, Intermotor, GP Sorensen, TechSmart, OEM, LockSmart, Four Seasons, Factory Air, EVERCO, ACi, Imperial, COMPRESSORWORKS, TORQFLO and Hayden. It also markets parts under private labels such as CARQUEST, Duralast, Duralast Gold, Import Direct, Master Pro, Murray, NAPA, Cold Power, NAPA Echlin, Mileage Plus, NAPA Temp Products and NAPA Belden. Well-recognized brand names help in expanding the consumer base. Standard Motor is not significantly exposed to the cyclical nature of the automotive industry since it is focused on the aftermarket, where it is a leading player. Demand for repair products is expected to rise, thanks to growth in the used-vehicles market and an increase in the average age of automobiles in the U.S. In addition, decrease in gas price is increasing the use of automobiles, thus increasing the number of miles traveled. This will have a favorable impact on the results of the company. In addition, the company is taking initiatives to manufacture products which it used to buy earlier, thus decreasing costs. Standard Motor is also setting up a Mexican manufacturing operation, which is likely to be very cost-efficient while ensuring high-quality products. Standard Motor is expanding its business through acquisitions. In the past three years, the company has made eight acquisitions. The company completed the buyout of Pensacola Fuel Injection for around $12.2 million in Jan Pensacola remanufactures and distributes a variety of diesel injectors, diesel pumps and turbo chargers. This acquisition should be beneficial for Standard Motor as it expects mounting sales of diesel-equipped light vehicles in North America to boost demand for diesel injectors and pumps. This, in turn, will boost the company s earnings. In Apr 2014, the Equity Research SMP Page 2

3 company acquired certain assets and liabilities of Annex Manufacturing, a distributor of a wide range of temperature control products for $11.5 million. The company expects the acquisition to boost future earnings, excluding one-time transition costs. Further, in Apr 2014, Standard Motor announced a 50/50 joint venture ( JV ) with Gwo Yng Enterprises a China-based manufacturer of air conditioning accumulators, filter driers, hose assemblies, and switches. The company will leverage the Gwo Yng collaboration to penetrate into the rapidly growing Chinese Temp Control market. RISKS For the first half of 2015, Standard Motor expects margins from Temperature Control to be soft due to increased average production cost in the second half of In addition, selling general & administrative expenses will increase in 2015 due to the rise in medical cost, wages and incentive compensation, normalized provisions for bad debts and increase in post-retirement non-cash amortization expenses. Standard Motor is adversely affected by the competitive nature of the automotive aftermarket. The company has to compete on the basis of prices, product quality and customer service. Price competition in the market mars the profit margin of the company. A large portion of Standard Motor s sales are derived from its major customers like NAPA Auto Parts, O Reilly Automotive, Inc., and Advance Auto Parts, Inc. The company s sales to these customers accounted for a significant amount of the total sales over the years. Thus, the loss of any key customer could significantly affect the company s results. RECENT NEWS Standard Motor Q4 Earnings Beat Estimates, Revenues Miss Feb 25, 2015 Standard Motor reported a 16.7% rise in adjusted earnings per share to $0.49 in the fourth quarter of 2014 from $0.42 in the year-ago quarter. Earnings also surpassed the Zacks Consensus Estimate by $0.03. Profits went up 17.5% to $11.4 million from $9.7 million in the year-ago quarter. Including non-operational gains and losses, earnings amounted to $11.5 million or $0.50 per share, compared with $9.4 million or $0.40 in the prior-year quarter. Total revenue decreased marginally to $218.1 million from $218.7 million a year ago, missing the Zacks Consensus Estimate of $220 million. Gross profit inched up 0.5% to $67.1 million (30.8% of sales) from $66.7 million (30.5% of sales) in the fourth quarter of Operating income increased 20.6% to $18.9 million from $15.7 million in the fourth quarter of Performance Standard Motor s adjusted earnings increased 8.6% to $2.52 per share for full-year 2014 from $2.32 in 2013, exceeding the Zacks Consensus Estimate of $2.49. Revenues for full-year 2014 dropped marginally to $980.4 million from $983.7 million in Also, revenues missed the Zacks Consensus Estimate of $982 million. Equity Research SMP Page 3

4 Segment Results Revenues at the Engine Management segment inched up to $175.9 million in the reported quarter from $175.8 million a year ago. Operating profit was $26.5 million (15.1% of sales), compared with $24.3 million (13.8% of sales) in the corresponding quarter last year. Gross profit was $56 million (31.8% of sales), compared with $55.5 million (31.6% of sales) a year ago. Revenues at the Temperature Control segment increased 3.7% to $39.7 million. The segment recorded an operating loss of $3.4 million (8.6% of sales), narrower than a loss of $3.8 million (9.8% of sales) in the fourth quarter of Gross margin increased to 18.6% from 16.5% a year ago. Revenues at the All Other segment decreased significantly to $2.4 million from $4.7 million a year ago. The segment recorded an operating loss of $4.3 million, marginally wider than $4.2 million in the fourth quarter of Financial Position Standard Motor had cash balance of $13.7 million as of Dec 31, 2014, compared with $5.6 million as of Dec 31, Long-term debt of the company stood at $258,000 as of Dec 31, 2014, versus $75,000 as of Dec 31, In 2014, the company had cash flow of $47 million from operating activities versus $57.6 million in the year-ago period. Capital expenditures rose to $13.9 million from $11.4 million a year ago. Capital Deployment On Feb 2, 2015, Standard Motor announced an increase in quarterly dividend to $0.15 per share from the prior payout of $0.13. In addition, the board of directors authorized the repurchase of up to an additional $10 million of its shares under the stock repurchase program. This increase is in addition to the previous $10 million repurchase program, which was authorized in Feb The company plans to finance the repurchase through its revolving credit facility. Acquisitions and Joint Venture In 2014, Standard Motor announced three acquisitions. The first takeover was that of Pensacola Fuel Injection, a re-manufacturer of diesel fuel. The company also acquired certain assets and liabilities of Annex Manufacturing, a distributor of a wide range of temperature control products. Further, Standard Motor announced a 50/50 JV with Gwo Yng Enterprises a China-based manufacturer of air conditioning accumulators, filter driers, hose assemblies and switches. The company expects the acquisitions to boost earnings, excluding the one-time transition costs, in the future. Equity Research SMP Page 4

5 VALUATION Currently, shares of Standard Motor are trading at 14.6x our 2015 EPS estimate of $2.84. The company s current trailing 12-month earnings multiple is 16.5x, compared with the 16.8x average for the peer group and 17.8x for the S&P 500. Over the last five years, shares of Standard Motor have traded in the range of 8.6x to 17.9x trailing 12-month earnings. The stock is trading at a discount to the peer group, based on forward earnings estimates. The current, which is closer to the upper end of the historical range, is at a 19.8% discount to the peer group for Our long-term Outperform recommendation on the stock indicates that it should perform better than the overall market. Our target price of $50.00, which is 17.6x our 2015 EPS estimate, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Standard Motor Products Inc. (SMP) Industry Average S&P Remy International, Inc. (REMY) N/A SPX Corporation (SPW) Dorman Products, Inc. (DORM) Douglas Dynamics, Inc. (PLOW) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Standard Motor Products Inc. (SMP) Industry Average S&P N/A 2.0 N/A Equity Research SMP Page 5

6 Earnings Surprise and Estimate Revision History Equity Research SMP Page 6

7 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of SMP. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1129 companies covered: Outperform %, Neutral %, Underperform 8.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst Copy Editor Content Ed. Lead Analyst QCA Reason for Update Kamalika Sinha Oindrila Ghoshal Dutta Sweta Goenka Sweta Goenka Anindya Barman Earnings Equity Research SMP Page 7