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Summary

  • In the wake of recently declared results the company’s stock price jumped by 28 percent. However, that does not mean that the potential for increase has been exhausted.
  • The company stands to benefit from the strong organic growth in both its wheel hub business and rotating electrical products business.
  • Additionally, Motorcar introduced brake master cylinders as a new addition in its product line. The launch of the product is considered a concrete step that will ensure enormous growth prospects.
  • The company was performing poorly in the past because it acquired Fenwick Automotive.
  • However, it has taken concrete and measurable steps such as the liquidation of Fenwick Automotive to eliminate the drag on profits.

Motorcar Parts of America (NASDAQ:MPAA) is a leading manufacturer, remanufacturer, and distributor of aftermarket automotive parts. The company deals in import and domestic cars, light trucks, heavy duty, agricultural and industrial applications. The company's products include rotating electrical products such as alternators and starters and wheel hub assemblies and bearings. It recently reported its first quarter 2014 results. All in all, these results were better than expected and supported by organic growth in almost all product lines. The company's net sales were $63 million reflecting an increase of 25.3 percent from last year's $50.2 million.

Responding to these results, the stock price jumped from $22 per share to $28.18 per share which is closer to its 52-week high of $29.29. This reflects an increase of approximately 28 percent within the last couple of weeks. However, whether or not the stock price still has potential to go higher is a concern that needs to be addressed. So in this article, I will be putting emphasis on investigating the company's future prospects.

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Source: Finviz.com

Brake Master Cylinder: A Step Forward

The company has been putting efforts into capitalizing on the multiple growth opportunities. To do so the company has been growing its product lines. The most recent step in this regard was the launch of the brake master cylinder as a new product line. The market size for master cylinders is estimated to be $500 million. Motorcar Parts seems to be confident about expanding its market share using brake master cylinders. The management expects the new product improve the company's performance in the coming quarters. Chief Executive Selwyn Joffe said, "We anticipate solid sales and profit contribution from this new product line".

The product is considered to be one of the most essential components in the braking system of a vehicle. To put things in perspective, it is estimated that approximately 1.1 percent of vehicles have to replace their master cylinder on an annual basis. Similarly, for vehicles that are more than 12 years old, the replacement rate almost doubles. The company has begun shipping the product and expects to generate revenues of approximately $8 million to $10 million. In the long term, given the importance of the brake master cylinder and the growth in the market, I believe that the product will generate even stronger revenues for the company.

Market Overview

The future growth prospects of the company are dependent upon the aging of cars. Currently, the average age of vehicles is estimated to be 11.4 years. The expectations are that the average age of light vehicles will continue to increase. As the car population ages,the company becomes well positioned to benefit from this trend.

The aftermarket for automobile parts is divided into two primary markets: the DIY market and the DIFM market. The DIY market is serviced by large retail chain outlets and consumers who buy from this channel generally install the parts into the vehicles by themselves. Conversely, the DIFM market is the professional installer market. The market is serviced by the traditional warehouse distributors, the dealer networks, and the commercial divisions of retail chains. The company has been distributing its products in both of these markets. At the most fundamental level, the market for replacement parts is primarily driven by the age of vehicles and the miles driven.

Motorcar: A Turnaround Story

The acquisition of Fenwick Automotive in 2011 proved to be a great setback for Motorcar. During these couple of years, the company witnessed deteriorated margins and shrinking earnings. Motorcar has since split off Fenwick's assets and debts and Fenwick is now in the process of liquidation. With the separation of Fenwick Automotive, Motorcar has eliminated any hindrance on its profits. It also allowed the company to sharpen its focus on its rapidly growing spare parts business.

Moreover, the company is well positioned to capitalize on the growth of the aftermarket parts business. As per the recent disclosure made by the management, the size of the aftermarket parts business is estimated to be more than $122 billion at the manufacturing price level with the rotating electrical segment estimated to be $1.4 billion and the wheel hub and bearing business estimated to be $1.2 billion. To conclude the above discussion, I believe that the new product will strengthen the company's operation base. In addition, Motorcar stands to benefit from the strong organic growth in both the wheel hub business and rotating electrical products business.