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On Aug 12, we maintained our Neutral recommendation on Meritor Inc. (MTOR - Analyst Report). 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.

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 (NAV - Analyst Report) 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 include Visteon Corp. (VC - Snapshot Report) and Gentex Corp. (GNTX - Snapshot Report). Both are Zacks Rank #1 (Strong Buy) stocks.

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