Standard Motor Fairly Priced to $7

Standard Motor Product, Inc. (SMP - Analyst Report) has achieved significant cost savings due to the successful integration of the Dana Engine Management (DEM) business. The company also enjoys strong brand recognition and a less cyclical end-market within the auto and auto parts industry. 

Moreover, SMP expects to benefit from the shifting of its production facilities to Mexico due to lower labor costs. However, slow growth, weak pricing in the company’s key businesses, and higher gasoline and metal prices are matters of serious concern. Further, the company’s Temperature Control segment is facing strong competition from Chinese imports. Thus, we rate shares of SMP a Hold with a target price of $7.00. This is 8.4x our 2008 EPS estimate.

The acquisition of the Ohio-based DEM Group in 2003 has improved the competitiveness of SMP. The management has generated savings of $55 million. The company has also taken other cost-cutting initiatives by focusing on inventory management and sourcing from low-cost countries such as in Asia and moving plant locations to Mexico and in Poland. With the shift to Mexico, the company expects annual cost savings of $9 million.

The auto parts market now faces weak pricing power. This, along with a soft aftermarket, adversely affects the engine management business of SMP. The company implemented its second major price reduction in two years reflecting an annual impact of approximately $6 million. For 2008, the company expects sales to remain flat in the engine management division with a decline in sales volume and a 2%-3% rise in prices.

Read the full analyst report on SMP