ArvinMeritor Upgraded to Buy

We upgrade global automotive parts supplier ArvinMeritor, Inc. (ARM - Analyst Report) to Buy from Hold. Presently, the company is planning to split itself into two. It is undergoing dramatic cost reductions as well as implementing an impressive global growth strategy.

ARM also focuses on Asian original equipment manufacturers (OEMs). The company won three major awards from Hyundai in the first quarter of 2008. In the light vehicle segment, ARM will supply more than 4 million window regulator motors beginning in 2010. In 2008, the company expects sales to rise to $750 million, up 32%. ARM plans to set up a new production facility in Monterrey, Mexico, which is expected to reduce costs and provide flexibility to meet higher demand anticipated in North America in 2009.

It plans to shut down operations at several global locations. This in turn is likely to bring annual run rate savings of $130-$140 million by 2012. ARM has introduced a new profit improvement initiative, "Performance Plus," to improve its cash flow, increase bottom line and enhance shareholder value. Savings are expected to be $75 million in 2008 and $150 million by 2009.

On May 28, 2008, ARM updated its guidance. Sales are expected to be $7.1-7.3 billion in 2008, and EPS is expected to be $1.40-1.60 per share in 2008. Currently, ARM’s shares are trading at approximately 11.2x our 2008 EPS estimate of $1.42. Our six-month target price is $20.00, which is based on 14.1x our 2008 EPS estimate of $1.42.

Read the full analyst report on ARM