Meritor Inc.
/ (MTOR-NYSE)/ Equity Research / MTOR | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 03/20/2012
Current Price (03/19/12) / $7.74
Target Price / $8.25
SUMMARY
Meritor has a high customer concentration, which implies limited scope for margin expansion. Further, the recent turmoil in the global economy is expected to continue to mar its results. Despite posting a profit, the company has missed the Zacks Consensus Estimate by $0.08 per share in the most recent quarter. Nevertheless, itcontinues to benefit from strong global truck demand. Meritor has optimized its global manufacturing footprint by outsourcing to low-cost countries, ensuring the flexibility to adjust production levels. Moreover, the divestment of its light vehicle systems business added a new dimension. As a result, we have upgraded our recommendation on the stock from Underperform to Neutral and set a target price of $8.25./ Equity Research / MTOR | Page 1
SUMMARY DATA
52-Week High / $20.0252-Week Low / $4.90
One-Year Return (%) / -58.74
Beta / 3.52
Average Daily Volume (sh) / 1,299,606
Shares Outstanding (mil) / 95
Market Capitalization ($mil) / $732
Short Interest Ratio (days) / 2.29
Institutional Ownership (%) / 83
Insider Ownership (%) / 3
Annual Cash Dividend / $0.00
Dividend Yield (%) / 0.00
5-Yr. Historical Growth Rates
Sales (%) / -13.4
Earnings Per Share (%) / -19.8
Dividend (%) / N/A
P/E using TTM EPS / 8.0
P/E using 2012 Estimate / 6.7
P/E using 2013 Estimate / 4.7
Zacks Rank*: Short Term
1–3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Above Avg.,
Type of Stock / N/A
Industry / Auto/Truck-Orig
Zacks Industry Rank * / 208 out of 267
OVERVIEW
Meritor Inc. (MTOR), headquartered in Troy, Michigan, is a global automotive parts manufacturer and supplier to various customers in North America, Europe and other parts of the world. Meritor is a worldwide supplier of a broad range of integrated systems, modules and components for commercial, specialty and light vehicles worldwide, and has developed leading positions in most of its markets. The company operates manufacturing facilities in 37 locations across North America, South America, Europe and Asia-Pacific. Meritor serves a broad range of original equipment manufacturers (OEMs) worldwide, including truck OEMs, light vehicle OEMs, trailer producers and specialty vehicle manufacturers, besides certain aftermarkets. The North American market contributed 48% of the company’s total revenue, Europe 22%, Asia-Pacific 14% and South America 16% in fiscal 2011.
The company now operates in three main segments after divesting its light vehicle systems (LVS) business:
- Commercial Truck (61% of revenues in fiscal 2011):This segment supplies drivetrain systems and components, including axles, drivelines and braking and suspension systems, primarily for medium- and heavy-duty trucks in North America, South America and Europe.
- Industrial (24%): Thissegment supplies drivetrain systems including axles, brakes, drivelines and suspension for off-highway, military, construction, bus and coach, fire and emergency and other industrial applications. This segment also includes the company’s businesses in Asia Pacific, including all on- and off-highway activities.
- Aftermarket & Trailer (22%): This segment supplies axle, brakes, drivelines, suspension parts and other replacement and remanufactured parts, including transmissions, to commercial vehicle aftermarket customers. This segment also supplies a wide variety of undercarriage products and systems for trailer applications.
Note: The percentage share of segment revenues in total revenues includes Inter-segment sales.
REASONS TO BUY
Meritor focuses on OEMs in low-cost countries across Asia and South America. The company aims to achieve $1 billion in Asian revenues in 5 years. It plans to open new plants in leading cost-competitive countries, including China and India. In South America, the company intends to grow by winning several significant business propositions.
Meritor is focused on improving its research, development, engineering and product design capabilities. In 2010, the company announced plans to invest $23 million over the next five years in order to enhance its research and development capabilities at a technical center in its Troy, Michigan headquarters. Through the investment, it will develop advanced technologies related to fuel efficiency, braking systems, suspensions and vehicle dynamics.
Meritor’s cash flow has improved. In the first quarter of fiscal 2012, the company’s operating cash flow was $5 million compared with an outflow of $49 million in the same quarter of fiscal 2011. Free cash flow from continuing operations before restructuring charges was minus $10 million compared with minus $34 million a year ago.
REASONS TO SELL
Meritor has a high customer concentration. The company’s ten largest customers contributed 70% of sales in fiscal 2011. The company’s three largest customers were AB Volvo, Navistar International Corporation and Daimler AG, representing approximately 24%, 11% and 11% of its total sales, respectively. This could hurt the company significantly in view of buyer power.
The recent turmoil in the industry has materially affected the automotive industry, thereby hurting Meritor’s business. Industry volumes in certain markets sustained at lower levels compared to historical standards. The company expects production volumes in North America to continue to remain at levels experienced during the second half of fiscal year 2011 and in Europe to weaken from fiscal year 2011 levels.
Meritor’s results are expected to be adversely affected by fluctuating prices of raw materials, primarily steel and oil. The price of steel increased significantly in fiscal year 2011 and is expected to remain at that level in near term.
RECENT NEWS
Meritor Makes Profits but Misses – February 2, 2012
Meritor Inc. reported a profit of $11 million or $0.12 per share in the first quarter of fiscal 2012 compared with a loss of $3 million or $0.04 per share in the same quarter of prior fiscal year (all excluding restructuring charges). However, the profit was lower than the Zacks Consensus Estimate of $0.20 per share.
Including restructuring charges, the profit was $13 million or $0.13 per share in the quarter under review compared with a loss of $6 million or $0.07 per share in the prior year quarter.
Sales went up 21% to $1.2 billion from the first quarter of fiscal 2011. This increase in sales was primarily due to stronger truck demand in all regions.
Adjusted EBITDA rose to $79 million from $65 million in the first quarter of fiscal 2011 due to the positive impact from increased sales, partially offset by higher material costs. Adjusted EBITDA margin was flat at 6.8% compared with the same period last year.
Segment Details
Commercial Truck sales grew 31% to $751 million. Segment EBITDA was $47 million for the quarter, up $14 million from the year-ago level driven by increased sales in all regions, partially offset by higher material costs.
Industrial segment sales rose 8% to $248 million, driven by the company’s on-highway business in India. Segment EBITDA was $11 million, down $6 million from the same period last year due to unfavorable changes in sales mix and higher material costs compared with the prior year.
Aftermarket & Trailer segment sales went up 11% to $235 million driven by sales gains in North America. Segment EBITDA was $20 million, up $4 million from the first quarter of fiscal 2011, primarily due to the favorable impact of higher sales.
Financial Position
Meritor had cash and cash equivalents of $211 million as of December 31, 2011, marginally down from $217 million as of September 30, 2011. Long-term debt was flat at to $1.0 billion as of December 31, 2011 compared with the same as of September 30, 2011. The company had a shareholder deficit of $983 million as of December 31, 2011 compared with $961 million as of September 30, 2011.
In the quarter, Meritor’s operating cash flow was $5 million compared with an outflow of $49 million in the same quarter of fiscal 2011. Capital expenditures increased to $25 million from $19 million in the prior fiscal year. Free cash flow from continuing operations before restructuring charges was minus $10 million compared with minus $34 million a year ago.
Guidance
For fiscal 2012, Meritor anticipates revenues to be $4.8 billion, adjusted EBITDA margin in the range of 8.2%–8.6%, adjusted profit in the range of $105 million–$135 million or $1.08–$1.39 per share. It also expects capital expenditures between $100 million and $110 million and free cash flow before restructuring charges in the range of $25 million to $75 million for the fiscal year.
VALUATION
Currently, Meritor shares are trading at 6.7X our 2012 EPS estimate of $1.16. The company’s current trailing 12-month earnings multiple is 8.0, compared with the 16.9 average for the peer group and 14.8 for the S&P 500. Over the last five years, Meritor shares have traded in a range of 0.3X to 104.1X trailing 12-month earnings. The stock is also trading at a steep discount to the peer group, based on forward earnings estimates. The current P/E, which is in the first quartile of the historical range, is at a 52% discount to the peer group for 2012. Our long-term Neutral recommendation on the stock indicates that it will perform in line with the broader market. Our $8.25 target price, 7.1X our 2012 EPS estimate, reflects this view.
Key Indicators
Earnings Surprise and Estimate Revision History
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DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of MTOR. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1027companies covered: Outperform- 16.3%, Neutral- 77.1%, Underperform – 5.7%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
Research Analyst / Souvik GuhaLead Analyst / Souvik Guha
QCA / Madhurima Das
Reason for Update / Earnings
/ Equity Research / MTOR | Page 1