Moody's Upgrades ArvinMeritor

Moody's Investors Service, the credit rating agency of Moody's Corporation (MCO - Analyst Report), upgraded its corporate family and probability of default ratings and ratings on senior unsecured notes on ArvinMeritor Inc. (ARM). The ratings upgrade was based on improving credit metrics and the likely improvement in commercial vehicle demand in near term.

The ratings agency raised the company's corporate family and probability of default ratings by one notch from B3 to B2. It also lifted ratings on senior unsecured notes to B3 from Caa1. However, the rating agency maintained its stable outlook on the company and kept its speculative grade liquidity rating unchanged at SGL-3.

In the first quarter of fiscal 2011, ArvinMeritor depicted a wider loss of $6 million or 7 cents per share (adjusted) compared with $4 million or 6 cents per share (adjusted) in the same quarter of prior fiscal year. With this, the auto parts maker missed the Zacks Consensus Estimate of breakeven results during the quarter.

The wider loss was attributable to an effective tax rate of approximately 133% on the back of strong earnings in emerging markets as well as the ongoing impact of valuation allowances against the company’s income tax loss carry forwards in the U.S. and Europe.

Sales in the quarter went up 21% to $971 million, driven by stronger truck demand in all regions. It was in line with the Zacks Consensus Estimate. Adjusted EBITDA was $62 million versus $51 million in the first quarter of fiscal year 2010. However, adjusted EBITDA margin was flat at 6.4% compared with the same period last year.

Despite lower earnings, ArvinMeritor is well positioned to benefit from its focus on original equipment manufacturers (OEMs) in low-cost countries across Asia and South America. The company aims to achieve $1 billion in Asian revenues in 5 years. In South America, the company intends to grow by winning several significant business propositions.

Moreover, the company is poised to grow after divesting its LVS business, which was exposed to cyclical aberrations in the auto industry. Due to these factors, the company retains a Zacks #3 Rank (Hold) on its stock for the short term (1 to 3 months) and we have reiterated our Neutral recommendation for the long term (more than 6 months).

ArvinMeritor, 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. ArvinMeritor 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’s major customers include AB Volvo and Navistar International Corporation (NAV - Analyst Report). Sales to these customers accounted for 21% and 11% of its total sales, respectively in fiscal 2010.

Read the full analyst report on MCO

Read the full analyst report on NAV

Read the full analyst report on ARM