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

Meritor is focusing on the OEMs based in Asia and South America.  The company plans to extend its footprint in the low-cost countries with new plants, especially in China and India. The company expects to generate revenues of around $1 billion from the Asian markets over the next 5 years. In South America, Meritor also plans to develop several significant business projects.  

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

However, Meritor remains exposed to high customer concentration risk. About 71% 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 22%, 15% and 11% of its revenues, respectively.

Moreover, soft economic conditions, especially in Europe, are adversely affecting the company’s business. Sales volume in the fourth quarter of 2012 also slid in certain markets compared with historical levels.

Meritor reported a 28.9% decline in adjusted earnings per share to 32 cents in the fourth quarter from 45 cents in the year-ago quarter. However, the results outpaced the Zacks Consensus Estimate by 14 cents. Profits decreased 27.9% to $31 million from $43 million in the fourth quarter of 2011.

Revenues went down 19% year over year to $986 million in the reported quarter, missing the Zacks Consensus Estimate of $1 billion. The decline was due to lower sales volumes in global markets and adverse currency translation impact.

Our Neutral recommendation on the stock is backed by a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.

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