We have upgraded the recommendation on Standard Motor Products (SMP) from Neutral to Outperform. This reflects the company’s improving outlook due to strong brand recognition, less cyclical end-market, efficient debt management measures and inventory management.

Standard Motor enjoys a strong competitive advantage due to its brand recognition and customer base. It distributes parts under established owned-brand names such as Standard, Blue Streak, BWD Automotive, Niehoff under Engine Management division, and Hayden and Four Seasons under its Temperature Control division as well as under private labels such as CARQUEST and NAPA Auto Parts.

Standard Motor has undertaken cost-cutting initiatives by focusing on inventory management, sourcing from low-cost countries such as in Hong Kong, Asia and moving plant locations to Reynosa, Mexico, particularly the Engine Management business, and to Poland in its European division. The company sold its Puerto Rico and Long Island City facilities in 2008 following the relocation of manufacturing operations to Reynosa, Mexico, to reap the benefits of cheaper labor. With the shift to Mexico, Standard Motor expects annual cost savings of $9 million and gross margin of 27%–28%, starting in 2009.

Standard Motor is not significantly exposed to the cyclicality of the automotive industry, as it is focused on the aftermarket and is a leading niche market player. More than 50% of the business focuses on the traditional aftermarket while the rest stresses on retail aftermarket. A steady increase in the number of autos on the road, an increase in the average auto age to 9.5 years and an incessant increase in the number of miles driven (3% annually) should increase the demand for repair products. Further, the company should gain from the OEMs’ move to withdraw from directly supplying parts. It can thus supply parts directly to the automakers’ dealers, which is a significant growth prospect.

Standard Motor has efficiently reduced debt. In the second quarter of 2009, the company has reduced its total debt by 50% or $137.8 million year-over-year, primarily through working capital improvement.

Standard Motor succeeded in beating the Zacks Consensus Estimate in the second quarter of 2009. The company reported earnings of $5.2 million or 27 cents per share, excluding non-operational gains and losses, higher than the Zacks Consensus Estimate of 14 cents per share. The results also depicted a significant improvement compared to breakeven results in the second quarter of 2008.

We have set a target price of $16 for the stock

Zacks Investment Research
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