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Meritor (MTOR) to Post Q3 Earnings: What's in the Offing?

Zacks Equity Research

Meritor Inc. MTOR is scheduled to release third-quarter fiscal 2019 earnings on Jul 31, before market open. In the last reported quarter, the company delivered positive earnings surprise of 18.4%. In fact, the company’s earnings surpassed estimates in all of the trailing four quarters, at an average beat of 17.3%.

In the past six months, shares of Meritor have outperformed the industry it belongs to. The stock has gained 26.8% compared with the industry’s 8.4% growth.


Let’s discuss the factors that are likely to make an impact on the upcoming quarterly announcement.

Factors Likely to Influence Q3

Meritor has strengthened its financial aspects and has expanded their customer base as well as relationships with long-term partners. The company has developed a robust product line across multiple applications. These factors are likely to provide electric drivetrain solutions to the company and drive fiscal third-quarter results.

The company is following a strategy of acquiring businesses to accelerate growth and is expected to work on the same in fiscal 2019. In May 2019, Meritor announced its plan to acquire Michigan-based company — AxleTech — that engages in designing, manufacturing and selling of drivetrain systems as well as components for a cash payment worth $175 million. Furthermore, Meritor signed the acquisition agreement with an affiliate of The Carlyle Group, a global investment company. These deals will enable the company to improve worldwide sales by expanding core competencies and increasing presence in adjacent markets.

The company has witnessed softening of North America Class 8 truck orders. However, the backlog continues to remain strong, which is driving a backlog to build the ratio of approximately eight months. This indicates that the company’s production level will remain high fin the soon-to-be-reported quarter.

The company has raised outlook for fiscal 2019 on the back of strong global end market support. Revenues are expected to be approximately $4.4 billion, up $100 million from the previous guidance. Additionally, adjusted EBITDA margin is expected to be 11.7%, an increase of 20 basis points year over year. Adjusted earnings per share are also expected to increase to $3.50.

In April, Meritor introduced the range of braking solutions to cater to multiple off-highway applications. The recently added brake options will boost the company’s modular brake portfolio and wheel-ends for various market segments. The company is making significant investments for the growth of off-highway business. These investments are likely to provide the customers with the most innovative, best performing products for their specific applications, built for the unique demands of the off-highway market.

However, Meritor’s increased investments to support long-term growth opportunities might hurt the company’s cash inflow in the third quarter results. Additionally, the company’s exposure to global markets can make it vulnerable to foreign-currency exchange rates, trading regulations and economic uncertainty. Also, high freight and steel costs can make it uncertain to predict if the company will post earnings beat in the upcoming quarterly results.

Meritor, Inc. Price and EPS Surprise


Meritor, Inc. Price and EPS Surprise

Meritor, Inc. price-eps-surprise | Meritor, Inc. Quote


What the Zacks Model Says

Our proven model does not conclusively show that the company is likely to beat earnings estimates in the quarter to be reported. This is because a stock needs to have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. This is not the case here as you will see below:

Earnings ESP: Meritor has an Earnings ESP of 0.00%. The Most Accurate Estimate and the Zacks Consensus Estimate are currently pegged at 95 cents, respectively. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: The company currently carries a Zacks Rank #3. However, the company's 0.00% ESP makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or #5 (Sell-rated) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

Stocks to Consider

Here are some stocks worth considering, which have the right combination of elements to beat estimates this time around:

Cummins Inc CMI has an Earnings ESP of +3.49% and carries a Zacks Rank #3. It is slated to release second-quarter 2019 results on Jul 31. You can see the complete list of today’s Zacks #1 Rank stocks here.

Barrick Gold Corporation GOLD has an Earnings ESP of +1.56% and currently carries a Zacks Rank of 2. It is slated to release second-quarter 2019 results on Aug 12.

Penske Automotive Group, Inc PAG has an Earnings ESP of +0.42% and currently carries a Zacks Rank of 3. The company is slated to release second-quarter 2019 results on Jul 30.

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