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Meritor Remains Neutral

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On May 13, we maintained our Neutral recommendation on Meritor Inc. (MTOR - Free Report) , based on its expansion of global manufacturing footprint by outsourcing to low-cost countries. These outsourcing efforts allow the company to adjust its production levels.

However, we are concerned about the high customer concentration, recent turmoil in the global economy and the year-over-year decline in the company’s profits in the second quarter of fiscal 2013.

Why Maintained?

On Apr 30, Meritor Inc. reported a significant fall in the adjusted income to $6.0 million or 6 cents per share in the second quarter of fiscal 2013 compared with $32.0 million or 33 cents in the year-ago quarter. However, earnings per share surpassed the Zacks Consensus Estimate by 5 cents.

Revenues went down 21.7% to $908.0 million, missing the Zacks Consensus Estimate of $934.0 million. The decline in revenues was due to lower sales volumes in global markets, excluding South America.

Following the release of the second-quarter results, the Zacks Consensus Estimate for fiscal 2013 increased 19.2% to 31 cents per share, but the same for fiscal 2014 dropped 2.9% to 66 cents. Currently, shares of Meritor maintain a Zacks Rank #3 (Hold).

Meritor will benefit from its focus on 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 also plans to develop several significant business projects in South America. In addition to this, Meritor aims to boost revenues and earnings by focusing on improving its research, development, engineering and product design capabilities.

However, Meritor faces challenges from its high customer concentration. About 71% of its revenues are generated from the top ten customers, with AB Volvo, Navistar International (NAV - Free Report) and Daimler AG contributing about 22%, 15% and 11%, respectively.

Other Stocks to Look For

A few stocks that are performing well in the broader industry include Visteon Corp. (VC - Free Report) and Tower International, Inc. (TOWR - Free Report) . Both the companies carry a Zacks Rank #1 (Strong Buy).

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