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Meritor Gains From Robust Demand Despite Rising Expenses

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On Nov 22, we issued an updated research report on Meritor, Inc. (MTOR - Free Report) .

Last week, this manufacturer and global supplier of automotive equipment reported its fourth-quarter fiscal 2018 earnings. The company’s adjusted earnings for the quarter were 82 cents per share, beating the Zacks Consensus Estimate of 78 cents. Sales were $1.08 billion, which surpassed the Zacks Consensus Estimate of $1.03 billion as well. Increased production across all key markets, improved market share and new business wins, aided the company’s results during the reported quarter.

A similar trend of increased production is expected to continue in the coming quarters as well. Strong demand for Class A trucks in North America, and steady demand for trucks across Europe, India and South America are expected to drive Meritor’s sales in fiscal 2019. For fiscal 2019, the company expects revenues of $4.25 billion while adjusted earnings from continuing operations are anticipated to be around $3.10 per share.

Meritor, Inc. Price and Consensus


Meritor is focused on achieving its targets of the M2019 business plan that focuses on driving growth. In fact, the company achieved two of the three financial targets of the multi-year plan a year prior to the actual closing period. In fiscal 2018, it generated adjusted EBIDTA of $474 million, which led to rise of $1.25 in adjusted earnings per share from fiscal 2015. Further, the company realized its second goal to reduce net debt-to-adjusted EBITDA ratio to less than 1.5.

Apart from achieving financial targets of the M2019 plan, Meritor is in sync with its strategy of acquiring businesses and introducing new products to accelerate growth. In April 2018, the company acquired assets of AA Gear & Manufacturing, enabling it to gain customers and expand capabilities for its components segment. Prior to this, Meritor acquired the product portfolio and related technologies of Fabco Holdings in August 2017.

However, augmented investments for its ongoing M2019 plan to support new programs is increasing the selling, general and administrative (SG&A) expenses of the company. In fiscal 2018, Meritor recorded SG&A expenses of $317 million compared with $264 million recorded a year ago. Continuous rise in expenses might hurt the company’s gross margin.

Further, dependence on the top three largest customers — AB Volvo, Daimler AG and PACCAR Inc. — that accounted for more than 50% of total sales in fiscal 2018 is another concern. Dependence on a few clients may hurt the company with respect to buyer power.

Of late, earnings estimates for Meritor have been going down. Over the past seven days, estimates for fiscal 2019 have moved down 0.9% to $3.22.

Price Performance

Over the past three months, Meritor’s stock has lost 25%, outperforming 28% decrease recorded by the industry it belongs to.


Zacks Rank & Key Picks

Meritor currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the auto space are Allison Transmission Holdings, Inc. (ALSN - Free Report) , Advance Auto Parts, Inc. (AAP - Free Report) and Tower International, Inc, (TOWR - Free Report) . Allison Transmission currently sports a Zacks Rank #1 (Strong Buy) while Advance Auto and Tower International carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Allison Transmission has an expected long-term growth rate of 10%. Shares of the company have increased 10.5% over the past six months.

Advance Auto Parts has an expected long-term growth rate of 14.6%. Shares of the company have rallied 39.5% over the past six months.

Tower International has an expected long-term growth rate of 8%. Over the past six months, shares of the company have gained 4.2%.

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