Auto parts retailers are handily outperforming the broader market so far this year, thanks to their defensive businesses. Yet one of their key suppliers has slumped, creating an opportunity for bargain-hunting investors.
(ORLY) are each well ahead of the S&P 500, and as Barron’s noted, that’s no surprise. These companies have pricing power and thrive during times of economic uncertainty, when consumers prefer to repair rather than replace their cars. By contrast,
Standard Motor Products
(SMP), which supplies the auto parts retailers, is off double digits.
“It’s well known that after market auto parts is defensive, and those stocks have become crowded; Standard Motor is a less known way to play that space, a small-cap way to get exposure to an objectively great end market,” says Stephens analyst Daniel Imbro, who has an Outperform rating and $61 price target on the shares, which would be 29% higher from Monday’s close at $47.38.
Standard Motor may be small—its market value hovers around the $1 billion mark—but it has been remarkably consistent, growing earnings per share since 2018 and actively expanding into new categories like electric, off-road, and heavy-duty vehicles.
Yet the shares change hands for 9.5 times forward earnings, compared with a historical range of about 11 times to 18 times. That means its valuation is well below not only its own averages, but those of all the retailers it supplies and its chief rival.
(DORM), which trades at nearly twice that level.
“I don’t think there’s that great a difference where Standard Motor is worth 50% less than its nearest peer,” says Matt Fleming, a portfolio co-manager at William Blair, Standard Motor’s fifth largest shareholder. “If we do see some economic turbulence, I think it’s going to hold up very well. It’s in a terrific position with a very high-quality blue-chip customer base that relies on Standard Motor as a critical part of their supply chain.”
Fleming likes that Standard Motors bolsters its margins by manufacturing the majority of the parts it sells, unlike Dorman, and does so in countries like Mexico and Poland that have fewer supply chain disruptions from lockdowns and port congestion, than China or elsewhere in Asia.
You wouldn’t know that by the stock’s performance. The shares have lagged behind not only in 2022, but in past years a well, and have been basically rangebound since 2016.
Part of that is down to the fact that it lost a customer about a year and a half ago that decided to move production in house—Imbro suspects it was
Advance Auto Parts
(AAP)—and that worried investors. Standard Motor declined to name the customer.
did not return requests for comment.
Yet despite that loss, Standard Motor didn’t miss a beat, with earnings per share climbing year over year in 2020, even as sales dipped. It’s since more than made up for the lost business, with earnings expected to rise 4% this year to an expected $4.63 a share, on a 7% increase in sales.
The other question is how safe earnings estimates are, amid worries about a recession. However, like its customers, Standard Parts actually gets a boost from economic uncertainty.
Putting a multiple of 11 times on the stock—again the low end of its historical range—shows the market appears to be pricing in a double-digit earnings per share decline in 2023, to less than $3.70, which is far below the current consensus. of $4.96.
Fleming argues that 15 times would be a reasonable multiple for the stock, given what he believes are secular tailwinds for its core auto business and “a significant untapped market” beyond that.
Indeed, Standard Motor has been making strides in broadening its business to include more heavy-duty, electric, and specialized products, helped by some acquisitions in recent years.
That means that after making up a relatively small portion of sales this “business line is on pace to represent 20% of Standard Motor’s sales by the end of 2022,” according to MKM Partners analyst Scott Stember, who recently initiated coverage of the shares with a Buy rating and $62 price target.
Moreover he argues that despite the acquisitions, as of the end of the first quarter the company’s “balance sheet was in excellent condition,” carrying a “very manageable” adjusted net leverage ratio of 1.4 times debt to trailing earnings before interest, taxes, depreciation and amortization, compared with 0.8 times at the end of 2021.
The company reports second-quarter earnings on Wednesday, and given how quickly the economic landscape has shifted, results and expectations may still need some recalibrating. Yet it still appears that the market is underestimating Standard Motor’s longer-term potential, given strong management, a healthy balance sheet, well-positioned customers, and defensive characteristics.
“The market is discounting earnings estimates that are overly bearish, and frankly we don’t see that,” says Fleming. “This is a great case where there are multiple ways” the stock can win.
Write to Teresa Rivas at [email protected]