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We are reiterating our Neutral recommendation on Meritor Inc. (MTOR - Analyst Report). The global automotive parts maker continues to benefit from strong global truck demand along with outsourcing strategy to low-cost countries. However, significant customer concentration risk remains a concern.

Meritor, in the third quarter of its fiscal year ending June 30, 2012, registered a 27% rise in its earnings to 38 cents per share from 30 cents per share in the year-ago quarter. However, the results missed the Zacks Consensus Estimate by a penny. The year-over-year growth was attributable to lower effective tax rate, leading to a decrease in income tax expenses.

Total revenues went down 12.5% year over year to $1.11 billion, missing the Zacks Consensus Estimate of $1.24 billion. The decline was due to lower sales volume in Brazil, Europe, China and India and weak currency translation.

Meritor is planning to extend its footprint in the low-cost countries, especially China and India. The company is also focusing on OEMs based in Asia and South America. It expects to generate revenues of around $1 billion from Asian markets over the next 5 years.

In addition, the company aims to boost revenues and earnings by focusing on commercial excellence including research, development, engineering and product design capabilities. The strong balance sheet of the company, with improving cash position, also supports its move.

However, Meritor remains exposed to high customer concentration risk. About 70% of its revenues are generated from the top ten customers. The largest customers including AB Volvo (VOLVY), Navistar International Corporation (NAV - Analyst Report) and Daimler AG (DDAIF) represents about 24%, 11% and 11% of revenues, respectively.

Moreover, soft economic conditions, especially in Europe, are adversely affecting the company’s business. Sales volume slid in the Commercial Truck and Aftermarket & Trailer segments in South America and Europe as well as in the Industrial segment in Asia Pacific in the most recent quarter.

Currently, Meritor retains a Zacks #4 Rank, which translates into a short-term (1 to 3 months) Sell rating.

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