This stock of auto parts may grow as new car sales flatten

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Shares of Standard Motor Products, which is a supplier to auto parts retailers like AutoZone, have fallen this year. Here: an AutoZone store in Memphis.

Andrea Morales/Bloomberg

Auto parts retailers are easily outperforming the broader market so far this year, thanks to their defensive activities. Yet one of their main suppliers has collapsed, creating an opportunity for investors looking for bargains.

Auto area

(symbol: AZO),

Authentic parts

(GPC), and

O’Reilly Automotive

(ORLY) are each well ahead of the S&P 500, and like Barrons noted, this is not a surprise. These companies have pricing power and thrive in times of economic uncertainty, when consumers prefer to repair rather than replace their cars. However,

Standard engine products

(SMP), which supplies automotive parts retailers, is in double digits.

“It’s well known that the auto parts aftermarket is defensive, and those stocks have become crowded; Standard Motor is a lesser-known way to play this space, a small-cap way to gain exposure to an objectively excellent end market,” says Stephens analyst Daniel Imbro, who has an outperform rating and a price target. of $61 on the shares, which would be 29% higher than Monday’s close at $47.38.

Standard Motor may be small – its market value is around $1 billion – but it has been remarkably steady, growing earnings per share since 2018 and actively expanding into new categories like electric, off-road and heavy-duty vehicles. .

Still, stocks are changing hands for 9.5x forward earnings, down from a historic range of around 11x to 18x. This means that its valuation is well below not only its own averages, but also those of all the retailers it supplies and its main rival.

Dorman Products

(DORM), which is trading at nearly double that level.

“I don’t think there’s such a big difference that Standard Motor is worth 50% less than its closest counterpart,” says Matt Fleming, co-portfolio manager at William Blair, Standard Motor’s fifth-largest shareholder. “If we see economic turbulence, I think it will hold up very well. It is in a formidable position with a very high quality blue chip customer base that relies on Standard Motor as a vital part of its supply chain.

Fleming likes that Standard Motors bolsters its margins by making the majority of the parts it sells, unlike Dorman, and does so in countries like Mexico and Poland that have less supply chain disruption from lockdowns and to port congestion, whether in China or elsewhere in Asia.

You wouldn’t know it by the performance of the stock. Stocks have lagged not only in 2022 but also in recent years, and have essentially been in a range since 2016.

This is partly due to the fact that he lost a customer about a year and a half ago who decided to move production in-house – Imbro suspects that was

Advanced auto parts

(AAP) – and that worried investors. Standard Motor declined to name the customer.

Automatic Advance

did not return requests for comment.

Yet despite the loss, Standard Motor hasn’t missed a beat, with earnings per share up year-on-year in 2020 even as sales tumbled. That’s since more than made up for the lost business, with earnings expected to rise 4% this year to $4.63 per share, on a 7% increase in sales.

The other question is how safe the earnings estimates are, amid worries about a recession. However, like its customers, Standard Parts actually benefits from economic uncertainty.

Putting an 11x multiple on the stock – again the low end of its historical range – shows that the market appears to be pricing in a double-digit drop in earnings per share in 2023, to less than $3.70, which is fine. below the current consensus of $4.96.

Fleming argues that 15 times would be a reasonable multiple for the stock, given what he sees as secular tailwinds for his core automotive business and “a significant untapped market” beyond that.

Indeed, Standard Motor has made progress in expanding its business to include more heavy-duty, electrical and specialty products, aided by some acquisitions in recent years.

This means that after representing a relatively small share of sales, this “business is on track to represent 20% of Standard Motor’s sales by the end of 2022”, according to MKM Partners analyst Scott Stember, who recently launched stock hedging with a buy rating and price target of $62.

Additionally, he argues that despite the acquisitions, at the end of the first quarter, the “company’s balance sheet was in excellent shape”, with a “very manageable” adjusted net leverage ratio of 1.4 times the debt on the earnings before interest, taxes, depreciation. and depreciation, compared to 0.8 times at the end of 2021.

The company reports its second-quarter results on Wednesday, and given how quickly the economic landscape has changed, results and expectations may still need recalibration. Yet it still appears the market is underestimating Standard Motor’s longer-term potential, given solid management, a healthy balance sheet, well-positioned customers and defensive characteristics.

“The market is discounting earnings estimates that are too bearish, and frankly, we don’t see it,” Fleming says. “This is a great case where there are multiple ways” the stock can win.

Write to Teresa Rivas at teresa.rivas@barrons.com

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