We are reiterating our Neutral recommendation on
). The global automotive parts maker continues to benefit from
strong global truck demand along with outsourcing strategy to
low-cost countries. However, significant customer concentration
risk remains a concern.
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Meritor, in the third quarter of its fiscal year ending June 30,
2012, registered a 27% rise in its earnings to 38 cents per share
from 30 cents per share in the year-ago quarter. However, the
results missed the Zacks Consensus Estimate by a penny. The
year-over-year growth was attributable to lower effective tax rate,
leading to a decrease in income tax expenses.
Total revenues went down 12.5% year over year to $1.11 billion,
missing the Zacks Consensus Estimate of $1.24 billion. The decline
was due to lower sales volume in Brazil, Europe, China and India
and weak currency translation.
Meritor is planning to extend its footprint in the low-cost
countries, especially China and India. The company is also focusing
on OEMs based in Asia and South America. It expects to generate
revenues of around $1 billion from Asian markets over the next 5
In addition, the company aims to boost revenues and earnings by
focusing on commercial excellence including research, development,
engineering and product design capabilities. The strong balance
sheet of the company, with improving cash position, also supports
However, Meritor remains exposed to high customer concentration
risk. About 70% of its revenues are generated from the top ten
customers. The largest customers including
Navistar International Corporation
) represents about 24%, 11% and 11% of revenues, respectively.
Moreover, soft economic conditions, especially in Europe, are
adversely affecting the company's business. Sales volume slid in
the Commercial Truck and Aftermarket & Trailer segments in
South America and Europe as well as in the Industrial segment in
Asia Pacific in the most recent quarter.
Currently, Meritor retains a Zacks #4 Rank, which translates into a
short-term (1 to 3 months) Sell rating.