Range-Bound Coca-Cola Hellenic
Coca-Cola Hellenic Bottling Company (CCH) enjoys an attractive geographic mix with 66 percent of revenues being derived from developing or emerging markets. In addition, the company's product mix is less dependent on carbonated soft drinks than other bottlers.
A key core competency is the company's strong distribution capabilities with its route-to-market assets. With fragmented trade channels, Coca-Cola Hellenic's route-to-market systems can drive increased delivery of the company's full product line and build relationships with outlet owners.
However, the company conducts business and reports financial results in Euros; therefore, much of the stock's performance is inversely correlated with the U.S. dollar's exchange rate with the Euro. Though the management has a sound business strategy and proven execution skills, the recent earnings warning precipitated a decline in the stock's price. The Hold rating is maintained.
Coca-Cola Hellenic has traded in a wide price-to-earnings (P/E) multiple range of 14 to 29 over the last five years. As the dollar has weakened versus the Euro, the company's earnings-per-share growth has accelerated and the P/E multiple has expanded. However, with the recent earnings warning, the P/E contracted as earnings momentum investors fled from the stock. The target price is based on a 16 P/E on trailing 12-month earnings; therefore, the target price is $30.
Standard Motor Fairly Priced to $7
Standard Motor Product, Inc. (SMP) has achieved significant cost savings due to the successful integration of the Dana Engine Management (DEM) business. The company also enjoys strong brand recognition and a less cyclical end-market within the auto and auto parts industry.
Moreover, SMP expects to benefit from the shifting of its production facilities to Mexico due to lower labor costs. However, slow growth, weak pricing in the company's key businesses, and higher gasoline and metal prices are matters of serious concern. Further, the company's Temperature Control segment is facing strong competition from Chinese imports. Thus, we rate shares of SMP a Hold with a target price of $7.00. This is 8.4x our 2008 EPS estimate.
The acquisition of the Ohio-based DEM Group in 2003 has improved the competitiveness of SMP. The management has generated savings of $55 million. The company has also taken other cost-cutting initiatives by focusing on inventory management and sourcing from low-cost countries such as in Asia and moving plant locations to Mexico and in Poland. With the shift to Mexico, the company expects annual cost savings of $9 million.
The auto parts market now faces weak pricing power. This, along with a soft aftermarket, adversely affects the engine management business of SMP. The company implemented its second major price reduction in two years reflecting an annual impact of approximately $6 million.
