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On Sep 30, we downgraded Standard Motor Products Inc. (SMP - Analyst Report) to Neutral. The downgrade was based on the company’s high dependence on some customers and price competition prevailing in the market. Both the top and bottom lines increased year over year in the second quarter of 2013, but they missed the Zacks Consensus Estimate.

Why the Downgrade?

On Aug 7, 2013, Standard Motor reported an 18.6% rise in adjusted earnings per share to 70 cents in the second quarter of 2013 from 59 cents in the year-ago quarter. However, earnings per share missed the Zacks Consensus Estimate of 76 cents.

Total revenue increased 0.5% to $270.1 million, missing the Zacks Consensus Estimate of $283 million. Revenues from Temperature Control segment declined marginally while the Engine Management segment reported an improved performance.

Following the release of the second quarter results, the Zacks Consensus Estimate for 2013 decreased 5.6% to $2.20 per share. The Zacks Consensus Estimate for 2014 dropped 1.6% to $2.51 per share. Currently, Standard Motor retains a Zacks Rank #4 (Sell).

We are concerned about the adverse effects of price competition prevailing in the market. This price competition is a result of imports from China and the price-cut strategy adopted by competitors. This leads to lower selling price; thus adversely affecting the profit margin of Standard Motor.

Moreover, sales of Standard Motor are mostly concentrated on its major customers like O’Reilly Automotive Inc. (ORLY - Analyst Report), NAPA Auto Parts and Advance Auto Parts Inc. (AAP - Analyst Report). The company’s sales to these customers accounted for about 19%, 18% and 15%, respectively, of total sales in 2012. The top 5 customers of the company represented about 64% of consolidated net sales in 2012. Thus, the loss of any key customer could significantly affect the company’s results.

Meanwhile, Standard Motor enjoys a strong competitive advantage due to its brand recognition and sizeable customer base. It distributes parts through established brand names and also under private labels.

In addition, 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 are expected to rise owing to the increasing number of vehicle models with different features on road, improved complexity in modern vehicles, expansion in the used vehicles market and an increase in the average auto age in the U.S.

Other Stocks to Consider

Motorcar Parts of America Inc. (MPAA - Snapshot Report) with a Zacks Rank #1 (Strong Buy) is performing well in the auto truck industry where Standard Motor operates.
 

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