Meritor (MTOR) to Gain from M2016 Plan, Headwinds Remain
On May 17, 2016, we issued an updated research report on Meritor, Inc. MTOR. This Zacks Rank #3 (Hold) company recorded adjusted income of 41 cents per share for the second quarter of fiscal 2016 (ended Mar 31, 2016) that was in line with the Zacks Consensus Estimate. Earnings also declined from 42 cents recorded a year ago.
Revenues fell 5% year over year to $821 million, well short of the Zacks Consensus Estimate of $840 million. The year-over-year decline is attributable to lower truck production in North and South America, and adverse currency impact in Brazil.
Meritor remains committed to its three-year plan, M2016, which aims at achieving margin expansion, debt reduction and revenue growth through operational efficiency, enhancing customer value and lowering product costs. The company witnessed improvements such as margin expansion and reduction in debt, alongside gaining new customers. Meritor aims to generate incremental revenues of $500 million from the beginning of fiscal 2013 through fiscal 2016 end. By the end of first-half fiscal 2016, the company was able to achieve $450 million in incremental revenues. With this, the company has attained almost 90% of its revenue target. The aim to reduce net debt (including retirement benefit liabilities) by more than $400 million has already been achieved and surpassed by Meritor. The plan will further improve operational excellence and reduce product costs.
Moreover, Meritor consistently enhances shareholder value through buybacks. In the first half of fiscal 2016, the company repurchased 3.9 million shares for $43 million pursuant to the equity and equity-linked repurchase authorizations. As of Mar 31, 2016, it had repurchased 8.1 million shares for $98 million and $19 million principal amount of its 4% convertible notes due 2027 pursuant to the equity and equity-linked repurchase authorizations. The company intends to fully utilize this repurchase program by the end of this year.
However, Meritor expects revenues for fiscal 2016 to be $3.28 billion, down from the previous expectation of $3.4 billion, and also lower than $3.51 billion recorded in fiscal 2015. Revenues will be adversely affected by the softening of the Class 8 truck market in North America and flat aftermarket sales. Further, Meritor expects free cash flow of $90 million, down from the previous estimate of $110 million.
Key Picks from the Sector
Some better-ranked automobile stocks include Lear Corp. LEA, Superior Industries International, Inc. SUP and Oshkosh Corporation OSK. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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