Industry analysts predict conservative growth for Standard Motor Products, Inc.

Ben Bernanke's admission that the country might be sliding into a recession, coupled with the Federal Reserve's almost unprecedented slashing of a key interest rate by three-fourths of a percentage point this past week, doesn't bode well for the nation's economic outlook. But industry analysts predict that the aftermarket will experience some periods of trend acceleration in 2008, given the high level of maintenance deferrals experienced over the past few years.

A case in point is Standard Motor Products, Inc. (SMP). Although the company issued a new Q4 2007 estimate of $0.07 per share, which is lower than the previous estimate of $0.09 a share, and has reduced its revenue assumption to $162.4 from $172.1, Tony Cristello, senior vice president of BB&T Capital Markets, expects the company's financial strength to improve over the next few years.

"A benefit to SMP's model is that a significant portion of its product lines have a non-discretionary element," Cristello says. "Whether ignition or wire products, those parts will ultimately fail and demand should pick up for the company."

Part of SMP's plan to keep its finances on track is to enter into a sale/leaseback program on the property it uses for its headquarters and ignition manufacturing operation in Long Island City. The company has agreed to sell the building for $40.6 million, and will begin transferring its ignition manufacturing and plastic molding operations from Long Island City to Reynosa, Mexico. This will eventually decrease the company's operating expenses and reduce the balance on the company's almost $10 million mortgage note.

According to Cristello, the sales/leaseback transaction will be slightly dilutive during the first 12 months, with $2 million in interest savings outweighed by an increased rent of $2.6 million. However, Cristello says that "going forward, the transaction should be modestly accretive as the company reduces the amount of its leased space at the (Long Island City) building and its rental expenses are reduced in a commensurate manner."

Cristello goes on to predict that SMP's financial outlook will improve in the coming years as the company transitions much of its labor-intensive manufacturing operations to Mexico while further consolidating its more automated production facilities. If the company stays on track and continues to diligently reduce its debt levels through a combination of internal cash flow generation and outsourcing, SMP will produce earnings growth in the teens to low twenties for the next few years.

"We are maintaining our Buy (1) rating on SMP and our 12 month price target of $12," Cristello says. "We believe that the transition to Mexico is on track and the stage is set for SMP to generate solid results in FY '09."

However, Cristello does admit that the current weak operating environment has created some revenue headwind for SMP. A more conservative inventory approach on the part of the company's customers, such as O'Reilly and NAPA, has created softer demand and therefore fewer replacement orders.

In addition, major revenue reductions or unforeseen costs associated with poorly executed transition initiatives could derail the company's plans for growth. Other risks include competitive pricing pressures that could reduce revenue opportunities, fluctuations in the price of gasoline, extreme weather events and seasonality in driving habits that would affect company operations as well as demand for SMP products from the company's customers.

But barring complications, SMP is on track for growth, albeit a conservative growth, Cristello says. And in this bear market, conservative growth may be a company’s safest bet.