Standard Motor Products (SMP Quick QuoteSMP - Free Report) is likely to benefit from triple buyouts of Trombetta, Stabil and the particulate matter sensor business of Stoneridge. Also, the growing demand for high-quality replacement parts bodes well. However, high-interest rates and commodity prices are major headwinds for the company.

Let’s discuss the factors highlighting the reasons for retaining the stock in your portfolio.

Growth Indicators

Standard Motor enjoys a strong competitive advantage due to brand recognition and a sizeable customer base. The company’s favorable manufacturing footprint with facilities in North America and Poland, bodes well. New business wins are likely to boost revenues across all segments.

Standard Motors’ efforts to expand its line of parts for hybrid and electric vehicles has set it up for long-term momentum. From 2022 through February 2023, SMP has added substantial coverage for hybrid and electric vehicles through its Standard® and Four Seasons® brands. SMP added 258 SKUs for hybrid vehicles, 60 SKUs for electric vehicles and 1,530 SKUs in the powertrain-neutral category. As hybrid and EV sales are rising, SMP is charged to meet the growing demand for high-quality replacement parts and is poised for revenue growth and new opportunities.  

The company's long-term debt to capital ratio of 0.25 is lower than the industry’s 0.34, giving it enough financial flexibility to tap into growth opportunities. Moreover, the company’s current ratio of 2.5 is favorable compared with the industry’s ratio of 1.32. The firm’s commitment to maximizing shareholders’ value via dividends and buybacks also instills confidence. The company has increased dividends four times in the last five years with an annualized growth of 6.05%.

Standard Motor has been consistently benefiting from acquisitions. The Pollak business buyout, which closed in 2019, enhanced its prospects in original equipment (OE), heavy-duty and commercial vehicle markets, aftermarket distribution, product management and service areas. The triple buyouts of Trombetta, Stabil and the particulate matter sensor business of Stoneridge (all closed in 2021) are driving the firm’s revenues. The three acquisitions together will add $300 million to the firm’s annual sales. Its recent Kade Trading buyout is anticipated to provide significant cross-selling access.

Concerns

Standard Motor is struggling with stabilized yet elevated commodity prices. Also, the sharp rise in interest rates since mid-2022 has adversely affected Standard Motor’s customer factoring program. High interest rates have also resulted in increased interest expenses due to higher debt levels. The elevated interest rates are likely to put downward pressure on margins in the near term.

Zacks Rank & Key Picks

SMP currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A few top-ranked players in the auto space are Geely Automobile Holdings Limited (GELYY Quick QuoteGELYY - Free Report) , BYD Company Limited (BYDDY Quick QuoteBYDDY - Free Report) and Mercedes-Benz Group AG , all of which sport a Zacks Rank #1.

Geely is engaged in automobile manufacturing and related areas. The Zacks Consensus Estimates for GELYY’s 2023 sales and earnings imply year-over-year growth of around 57.5% and 7.4%, respectively.

BYD is engaged in the research, development, manufacture and distribution of automobiles, secondary rechargeable batteries and mobile phone components. The Zacks Consensus Estimate for BYDDY’s 2023 sales implies year-over-year growth of around 209.6%.

Mercedes-Benz develops, manufactures and sells passenger cars, including premium and luxury vehicles. The Zacks Consensus Estimate for MBGAF’s 2023 sales implies year-over-year growth of 6%.