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Why Is Meritor (MTOR) Down 1.1% Since Last Earnings Report?

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It has been about a month since the last earnings report for Meritor (MTOR - Free Report) . Shares have lost about 1.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Meritor due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Meritor’s Q3 Earnings & Revenues Drive Past Estimates

Meritor recorded adjusted earnings of 89 cents per share in third-quarter fiscal 2018 (ended Jun 30, 2018) compared with 64 cents a year ago. The figure comfortably surpassed the Zacks Consensus Estimate of 78 cents.

Adjusted income from continuing operations was $80 million compared with $60 million in third-quarter fiscal 2017.

Sales increased approximately 23% year over year to $1.13 billion. The top line also beat the Zacks Consensus Estimate of $1.06 billion. This rise was due to revenue outperformance through improved market share and business wins.

Meritor’s adjusted EBITDA (earnings before interest, tax, depreciation and amortization) increased to $135 million from $103 million a year ago. Adjusted EBITDA margin was 12% compared with 11.2% a year ago. The gain in adjusted EBITDA and EBITDA margin is driven by an increase in revenues and the positive impact of changes in the company's pension and retiree medical benefits. These positives were partly offset by a decrease of $8 million in earnings due to the selling of the company's interest in Meritor WABCO joint venture.

Segmental Results

Revenues from the Commercial Truck & Trailer segment increased to $904 million, up 24% from the same period last year. This upside was primarily driven by higher production across all major markets. Segment adjusted EBITDA jumped to $103 million, up $32 million from the year-ago quarter. EBITDA margin rose to 11.4% in comparison with 9.8% in the same period last year.

Revenues from the Aftermarket & Industrial segment were $273 million, up 15% from the year-ago quarter. The gain was primarily due to higher volumes in the Aftermarket business. Segment adjusted EBITDA was $35 million, up $4 million from the same time frame a year ago. EBITDA margin moved up to 12.8% in comparison with 12.7% in the preceding year. Rise in both adjusted EBITDA and EBITDA margin were due to higher sales and the favorable impact of changes in retiree medical benefits. The gain was partly offset by elevated material and freight costs.

Financial Position

Meritor’s cash and cash equivalents totaled $100 million as of Jun 30, 2018, compared with $88 million as of Sep 30, 2017. Long-term debt slumped to $728 million as of Jun 30, 2018, from $750 million as of Sep 30, 2017.

At the nine-month end of fiscal 2018, Meritor’s cash inflow from operating activities was $191 million compared with the cash inflow of $136 million in the same period a year ago. Capital expenditure was $52 million, similar to the year-ago figure.

Fiscal 2018 Outlook

For fiscal 2018, Meritor expects revenues of $4.1 billion compared with the previous expectation of $4-$4.1 billion. Adjusted earnings per share from continuing operations are anticipated to be $2.9-$3 per share compared with the past projection of $2.7-$2.85. Adjusted EBITDA margin is estimated to be approximately 11.3%, marking a slight increase from the prior expectation of 11.2%. Further, the company anticipates free cash flow of $135-$145 million for fiscal 2018 compared with the prior guidance of $120-$135 million. Similarly, operating cash flow is likely to be $230-$240 million, up from the previous view of $220-$235 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 12.94% due to these changes.

VGM Scores

At this time, Meritor has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for value investors than growth investors.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise Meritor has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.




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