On Aug 12, we maintained our Neutral recommendation on
). We appreciate the company's focus on expanding its global
manufacturing footprint by outsourcing to low-cost countries. In
addition, introduction of the M2016 plan and introduction of new
businesses is expected to have favorable impacts on the results
in the long run. However, we are concerned about the
year-over-year deterioration in the company's performance in the
third quarter of fiscal 2013.
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Why the Reiteration?
On Jul 31, Meritor reported that it generated adjusted income of
$33 million or 34 cents per share in the third quarter of fiscal
2013, which declined from $37 million or 38 cents a share in the
year-ago quarter. However, the results surpassed the Zacks
Consensus Estimate of 20 cents.
Revenues went down 10.8% year on year to $993 million and missed
the Zacks Consensus Estimate of $1.03 billion. The decline in
revenues was due to lower sales in military business in North
America and China.
Following the release of the third-quarter results, the Zacks
Consensus Estimate for fiscal 2013 increased 9.4% to 35 cents per
share. Meanwhile, the Zacks Consensus Estimate for fiscal 2014
rose 5.8% to 73 cents per share. Currently, shares of
Meritor have a Zacks Rank #3 (Hold).
Meritor will benefit from its focus on OEMs (Original Equipment
Manufacturers) based in Asia and South America. The company plans
to extend its footprint in the low-cost countries, especially in
China and India, by launching new plants. The company will also
benefit from the launch of M2016, a 3-year plan with specific
targets for improving operational excellence, customer value and
reducing product costs of the company.
However, Meritor faces challenges from its high customer
concentration. About 71% of its revenues are generated from the
top 10 customers, with AB Volvo,
Navistar International Corporation
) and Daimler AG contributing about 22%, 15% and 11%,
respectively. In addition, uncertain global economic condition is
a headwind for the company.
Other Stocks to Look For
Some stocks that are performing well in the automotive industry
). Both are Zacks Rank #1 (Strong Buy) stocks.