Standard Motor Products, Inc.

SMP Details

Standard Motor Products, Inc. (NYSE: SMP) is a major automotive aftermarket manufacturer and distributor of engine management and temperature control systems, with a growing focus on the industrial equipment and original equipment (OE) service markets. It generates revenue via two major business segments: 1) Engine Management, which manufactures and remanufactures ignition and emission parts, fuel, and safety-related sensors for vehicle systems, and 2) Temperature Control, focused on air conditioning compressors, air conditioning and heating parts, and other climate control parts.  SMP's goods are largely sold in the U.S., with a geographic presence in Canada, Mexico, Europe, Asia, and Latin America. As of July 27, 2021, the company’s market capitalization stood at USD 929.18 million.

Global Footprint (Source: Q1FY21 Investor Presentation)

Inorganic Growth Endeavors: SMP acquired 100% of Trumpet Holdings, Inc. (Trombetta) on June 1, 2021, for a total consideration of USD 108 million. Trombetta is a major global provider of power management and power switching equipment to OEM customers and generates USD 60 million in annual revenues. The transaction helps SMP in diversifying beyond its core aftermarket business and is expected to be accretive to its FY21 earnings.

The company had previously purchased some assets and liabilities of Stoneridge, Inc.'s particulate matter sensor business, including production lines in Lexington, Ohio, and Tallin, Estonia, on March 08, 2021. Annual revenue from this matter sensor business segment is estimated to be in the range of USD 12 to 14 million. This transaction is expected to bolster SMP's expansion into the original equipment heavy-duty market.

Q1FY21 Results: The company reported a slight increase of 8.75% in net sales to USD 276.55 million in Q1FY21 (ended March 31, 2021) compared to USD 254.30 million in Q1FY20. Net earnings surged to USD 21.00 million in Q1FY21 vs. USD 8.63 million in Q1FY20. As of March 31, 2021, the company had cash and cash equivalents of USD 17.10 million and total debt of USD 42.57 million. The company announced a quarterly dividend of USD 0.25 per share on May 05, 2021. The dividend was payable on June 01, 2021, to stockholders on record on May 17, 2021.

Key Risks: The company's five largest individual customers accounted for 68%, 69%, and 70% of its net sales in FY20, FY19, and FY18, respectively. The loss of one or more of these clients, or a significant decrease in sales to any of them, could have a materially adverse impact on the company’s financial situation.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

SMP Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: SMP fell 9.60% in the past nine months and is currently trading in the lower-band of the 52-week range of USD 38.73 to USD 55.29. The stock is currently trading below its 50 and 200 DMA levels, and its RSI Index is at 32.33. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 50.86. Considering the correction in the stock price in the past nine months, recent inorganic growth programs, robust balance sheet, current valuation, and associated risks, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 41.71, down 0.41% as of July 27, 2021.

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Strattec Security Corp.

STRT Details

Strattec Security Corp. (NASDAQ: STRT) primarily serves North American automotive customers by designing, developing, manufacturing, and marketing automotive door handles and exterior trim, electronic keys and locksets, steering column and instrument panel ignition lock housings, latches, power sliding door systems, and other related automotive products. STRT has a strategic partnership with WITTE Automotive (Velbert, Germany) and ADAC Automotive (Grand Rapids, Michigan), through which they offer each other's goods to global consumers under the "VAST" brand. In addition, General Motors, Fiat Chrysler Automobiles, and Ford Motor Company are among STRT's significant clients.

Sales Distribution (Source: Company Presentation, May 19, 2021)

9MFY21 Results: The company reported a 9.34% rise in net sales to USD 375.24 million during 9MFY21 (ended March 28, 2021) compared to USD 343.18 million during 9MFY20 (ended March 29, 2020), primarily due to an increase in orders from General Motors, Ford Motor, Hyundai/Kia and other tier-1 customers. STRT reported an increase in net income to USD 25.56 million during 9MFY21 vs. USD 6.50 million during 9MFY20. As of March 28, 2021, the company had cash and cash equivalents of USD 11.34 million with a total debt of USD 16.00 million. The auto parts manufacturer significantly decreased its outstanding borrowings under credit facilities to USD 16.00 million as of March 28, 2021, from USD 35.00 million reported on June 28, 2020.

Key Risks: During FY20 and FY19, the business generated 62% and 60% of its total sales from three clients: General Motors, Fiat Chrysler Automobiles, and Ford Motor Company. Such undue reliance on a small set of customers for business could hurt the company’s financial health. Moreover, STRT's principal raw materials include high-grade zinc, brass, nickel silver, aluminum, steel, and plastic resins. The company has only one primary supplier for each raw material, putting it at risk of vendor concentration.

Outlook: STRT estimates its total capital expenditure for FY21 to be around USD 10 million, of which USD 6.4 million had been incurred as of March 28, 2021, for new projects and upgrading and replacing old equipment.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

STRT Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: STRT’s share price has fallen by 16.15% in the past three months and is currently trading close to the mid-point of the 52-week range of USD 17.04 to USD 67.28. The stock is currently trading below its 50 and 200 DMA levels, and its RSI Index is at 29.99. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 47.47. Considering the correction in the stock price in the past three months, continuous decline in outstanding debt, and strong track record, we recommend a “Speculative Buy” rating on the stock at the current price of USD 39.50, down 1.31% as of July 27, 2021, 11:36 AM ET.

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. 

Envela Corporation

ELA Details

Envela Corporation (NYSE: ELA) engages in a variety of business activities, including the recommercialization of luxury assets (jewelry, diamonds, fine watches, etc.), asset recycling, and IT asset management services, as well as providing services to industrial and commercial companies through its subsidiaries, namely 1) DGSE, LLC, which focuses on the recommercialization of luxury hard assets through the Dallas Gold & Silver Exchange (5 retail outlets), Charleston Gold & Diamond Exchange (1 retail outlet), and Bullion Express brands; and 2) ECHG, LLC, which resells IT equipment and consumer electronics.

Expanding Electronic Trade Abilities: ELA announced on June 10, 2021, that its subsidiary CEX Holdings, LLC (CEX) acquired the assets of CExchange LLC, a pioneer in electronics-trade-in services for retailers. The transaction is expected to result in cost-cutting and efficiency, plus growth in revenue and earnings for ELA. It will also help strengthen the company’s position in the recommerce industry.

Continued DGSE Retail Expansion: On May 11, 2021, DGSE secured a purchase agreement for a retail facility in Frisco, Texas, for its next Gold & Silver exchange location in the Dallas/Fort Worth metroplex. This adds to the recently built storefronts in Lewisville and Grapevine, Texas, signaling an ambitious growth of Gold & Silver Exchange locations.

Q1FY21 Results: The company reported a slight decline of 1.31% in net sales to USD 25.49 million in Q1FY21 (ended March 31, 2021) compared to USD 25.83 million in Q1FY20, due to an increase in the line of products under the ECHG segment. Net income surged to USD 2.01 million in Q1FY21 compared to USD 1.17 million in Q1FY20. The company had cash and cash equivalents of USD 8.40 million and total debt of USD 15.30 million as of Q1FY21.

Key Risks: N10TR, LLC and Eduro Holdings, LLC hold 47.7% and 23.7% stakes, respectively, in ELA. John R. Loftus, the company's CEO, oversees both N10TR and Eduro and hence, all matters needing shareholder approval are under Mr. Loftus' authority. This concentration of ownership and voting power can limit the minority shareholders’ ability to influence corporate matters. Furthermore, a single Dallas refining partner is DGSE's main source of income and expenses, with one refining customer accounting for a significant portion of ECHG's revenue. Any change in the company's relationship with these parties could negatively impact its finances.

Outlook: As of Q1FY21, capital expenditures are projected to be ~USD 250,000 in the NTM period. The purchase of equipment and properties by DGSE for retail outlets and the office building bought by ELA for its corporate offices are anticipated to drive these expenditures.

Valuation Methodology: Price/Earnings Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

ELA Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: ELA's share price has fallen 32.99% in the past three months and is currently leaning towards the lower band of the 52-week range of USD 2.93 to USD 7.42. The stock is currently trading below its 50 and 200 DMA levels, and its RSI Index is at 36.98. We have valued the stock using the Price/Earnings-based relative valuation methodology and arrived at a target price of USD 4.70. Considering the company’s expansion initiatives, decent financials, current valuation, and associated risks, we recommend a “Speculative Buy” rating on the stock at the current price of USD 3.86, up 1.31% as of July 27, 2021, 2:26 PM ET.

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.