Stoneridge, the auto parts manufacturer, may not be a household name, but they could be sitting on a potential goldmine. While analysts are focused on the company's flashy MirrorEye technology, a little-known EU regulation, the Smart 2 tachograph, could be Stoneridge's secret weapon for explosive profit growth.

Reference: Stoneridge, Inc. (NYSE:SRI) Q1 2024 Earnings Call Transcript

What is a Tachograph?

Tachographs are devices installed in commercial vehicles to record driving time and speed, acting as a "black box" for trucks. The EU's Mobility Package, a set of regulations aimed at improving road safety and driver conditions, mandates the adoption of the next-generation Smart 2 tachograph.

The Aftermarket Opportunity

The Smart 2 regulation isn't just about new trucks. Existing trucks with older tachographs must be retrofitted with Smart 2 devices by the end of 2024. This creates a massive, time-sensitive aftermarket opportunity for Stoneridge.

Initially, drivers were slow to adopt the new devices, perhaps hoping for a regulatory delay. However, the European Commission has reiterated the 2024 deadline, meaning pent-up demand is likely to surge as the deadline looms.

Reference: Stoneridge, Inc. (NYSE:SRI) Q1 2024 Earnings Call Transcript

Stoneridge's Smart 2 Projections

Stoneridge estimates Smart 2 revenue will reach $60 million in 2024, with a substantial portion from the aftermarket. The Mobility Package will further expand the regulation in 2025 and 2026, requiring smaller vehicles involved in international transport to adopt Smart 2. With its established market position and limited competition, Stoneridge expects to capture a significant share of this growing market, projecting a minimum 30% market share and $100 million in peak annual revenue.

Reference: Stoneridge, Inc. (NYSE:SRI) Q1 2024 Earnings Call Transcript

Why This Matters

Higher Margins: Aftermarket sales typically have higher margins than original equipment manufacturer (OEM) sales, bolstering Stoneridge's profitability.

Outsized Opportunity: The Smart 2 opportunity is larger than even the most optimistic projections for MirrorEye. While MirrorEye contributes to growth, the Smart 2 regulation offers a clear path to exceeding Stoneridge's own long-term revenue targets.

Strategic Advantage: Stoneridge is leveraging a relatively minor regulatory change for substantial value and earnings expansion. While the market focuses on flashy tech, Stoneridge is quietly positioning itself for explosive growth through a less glamorous, but highly profitable avenue.

Projected Smart 2 Revenue Growth

Stoneridge Segment Performance (Q1 2024)

Control Devices declined $8.7 million YoY, Electronics increased $15.6 million YoY (11.1% growth), Stoneridge Brazil $12.2 million (down $2 million YoY)

Reference: Stoneridge, Inc. (NYSE:SRI) Q1 2024 Earnings Call Transcript

Conclusion

The Smart 2 tachograph regulation presents a significant, underappreciated opportunity for Stoneridge. While it may not be as attention-grabbing as MirrorEye, this "silent weapon" has the potential to drive substantial revenue and margin expansion, positioning Stoneridge for a period of explosive growth.

"Fun Fact: The term "tachograph" comes from the Greek words "tachos" (speed) and "graphein" (to write). Early tachographs used a stylus to record speed and distance on a paper disc."