A Closer Look at SMP
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Business
Standard Motor Products (NYSE: SMP) sells replacement engine and climate control parts for automobiles. SMP is poised to benefit from two major trends: the aging of vehicles (the average age of U.S. light vehicles was 10.6 years in 2010, up from 8.9 years 10 years before, and the number of cars older than 7 years is expected to grow 3% annually), leading to increased demand for replacement parts, and the closing of car dealerships (around 20% of new car dealerships have closed in the last 5 years), benefiting independent distributors and repair shops.
SMP also benefits from selling “non-discretionary” automobile parts. SMP is largely focused on engine management (71% of the business) and temperature control (27% of the business). Engine maintenance cannot be deferred like cosmetic maintenance. If the car's engine does not work, the car is useless. Temperature control repairs, although not as necessary as engine repairs, are fairly non-discretionary. A car without air conditioning in the south and a car without heat in the north are miserable in the summer and winter, respectively.
Lastly, SMP has undertaken beneficial strategic initiatives. SMP has more than doubled (21% to 56%) the percentage of production labor hours that come from low cost facilities since 2005. Also, SMP has increased the percentage of purchases from low cost suppliers from 34% to 56% since 2005. Finally, they have reduced salaried headcount by 10% and paid down debt, creating a leaner more nimble company.
Financials
SMP is trading close to its highs, but with a 13 p/e, it is hardly expensive. SMP grew sales 10% from 2009 to 2010 and is on pace to do they same this year. However, because total operating expenses only grew 6%, SMP was able to earn $1.09 a share in 2010 compared to $0.30 in 2009. They are on pace to grow earnings by a significant amount again in 2011, having earned $1.51 through the first three quarters. Over the next five years, analysts expect SMP to grow earnings at a 20% clip. Lastly, SMP has been free-cash-flow positive for three years (and should make it four years this year) and has used its cash to pay down debt and finance a $0.28 dividend (1.35% yield currently).
Corporate Governance
SMP is still largely dominated by its founding family. Lawrence Sills is CEO and Chairman of the Board and his brothers Arthur and Peter, while not working for the company, both have board seats, leaving the Sills in control of a third of SMP's board. Eric Sills, Lawrence's son, is also an officer in the company. These four family members are the four largest individual stock holders in the company, controlling nearly 16% of the company's shares.
This level of insider ownership is a double edge sword. On the positive side, the company owners are highly incentivized to make the company's share preform well. On the negative side, the Sills have enough power to block certain actions that may be best for shareholders. For example, if someone wanted to buy the company, the Sills, not wanting to lose the family company, could fight to block the transaction even though it would be beneficial to shareholders.
Aside from the apparent nepotism at executive and officer positions, I've found nothing that indicates the Sills are running the company like a family business and not a public company.
In conclusion, SMP looks like a strong company poised for future success. I would look to start adding on any 3-5% dips.
I do not have a position in any of the companies mentioned in this entry.
