We reiterate our Neutral recommendation on
). The global automotive parts maker continues to benefit from
its outsourcing strategy to low-cost countries. However,
significant customer concentration risk remains a concern.
Meritor is focusing on the OEMs based in Asia and South
America. The company plans to extend its footprint in the
low-cost countries with new plants, especially in China and
India. The company expects to generate revenues of around $1
billion from the Asian markets over the next 5 years. In South
America, Meritor also plans to develop several significant
In addition, the company aims to boost revenues and earnings by
focusing on commercial excellence including research,
development, engineering and product design capabilities. The
company's strong balance sheet with improving cash position, also
supports this move.
However, Meritor remains exposed to high customer concentration
risk. About 71% of its revenues are generated from the top ten
customers. The largest customers including
Navistar International Corporation
) represents about 22%, 15% and 11% of its revenues,
Moreover, soft economic conditions, especially in Europe, are
adversely affecting the company's business. Sales volume in the
fourth quarter of 2012 also slid in certain markets compared with
Meritor reported a 28.9% decline in adjusted earnings per share
to 32 cents in the fourth quarter from 45 cents in the year-ago
quarter. However, the results outpaced the Zacks Consensus
Estimate by 14 cents. Profits decreased 27.9% to $31 million from
$43 million in the fourth quarter of 2011.
Revenues went down 19% year over year to $986 million in the
reported quarter, missing the Zacks Consensus Estimate of $1
billion. The decline was due to lower sales volumes in global
markets and adverse currency translation impact.
Our Neutral recommendation on the stock is backed by a Zacks #3
Rank, which translates into a short-term (1 to 3 months) Hold
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