5 Mid-Cap Losers From Thursday: What to Expect Now

by: Rash Menaria

The following is a list of five major mid-cap losers from Thursday:



% Loss

Meritor Inc



Car Max Inc



AMR Corporation



TAL International Group



Jabil Circuit



Here are some specifics about these stocks and what to expect from them going forward:

Meritor Inc. (MTOR), a leading global supplier of drive train, mobility, braking and aftermarket solutions for commercial vehicle and industrial markets, fell more than 15% in trading after it revised its Q2FY11 guidance and announced the closure of their Trailer Axle business in Europe. Although the company increased its revenue guidance to $1.18-$1.21 bln (up from $1.125 - $1.175 bln guided earlier), investors were disappointed as it reduced adjusted EBITDA guidance to $77-$83 mn (from $85-$95 mn guided earlier).

The new guidance implies that the company’s sequential incremental margin now stands at 8% compared to 15% as estimated earlier. The margin decline comes on account of the increasing steel price, royalty income dispute and launch cost of Caiman. Further, the company also announced its decision to close the trailer axle business in Europe due to the slower than anticipated growth of the industry and unsustainable financial returns from the business. The company plans to divert the expenditure planned for the axle business to other businesses of the company.

The rising input prices are an industry wide phenomenon and not a company specific one. Also, the royalty dispute is an onetime cost and should be seen in that light only. Although one may like to wait for more clarity, the stock at current levels (P/E ~9x FY2012e) looks attractive from a medium to long term perspective.

CarMax Inc. (KMX), a retailer of used vehicles in the US, fell more than 7% in trading despite largely in line Q4FY11 numbers. The company reported Q4 EPS of $0.39 (up ~50% y-o-y and slightly above consensus estimate of $0.38), Q4 revenues at $2.25bn (up ~23% y-o-y) and gross margins at 14.10% (down 24bps y-o-y but in line with street estimates). For the complete fiscal 2011, sales increased by 20% to $8.98 bln and FY11 EPS stands at $1.67 (increase of 35% y-o-y). The company expects to open 5 new stores in calendar year 2011 and a total of 8-10 stores in FY12. The company guided the CarMax Auto Finance (CAF) income at $205-$235mn (below consensus estimate) on account of higher loan loss provisioning.

Although the decline in gross margins may have disappointed some of the momentum investors who are likely to exit - thus pressuring the stock price - the company has excellent longer term prospects. The used car market is highly fragmented and KMX can be a secular market share gain story for the next several years. The stock is trading at a consensus P/E of ~16x for FY13e and is a good buy for long term investors.

AMR Corporation (AMR), a scheduled passenger airline in US, fell more than 5% in yesterday’s trade. Its shares spiked 4.1% on Wednesday, after the company reportedly received an offer from Sterling Global Holdings for a buy-out at a price of $9.75 per share. The legitimacy of the offer is questionable and AMR is checking the authenticity of the offer.

The company’s business continues to struggle due to higher crude prices and management’s reluctance to revise the capacity. The company is scheduled to launch its JV with Japan Airlines on 1st April 2011, which will give it an entry point into the Asia Pacific Region, although the traffic is expected to remain subdued on the back of Japan's disaster. Management’s silence on capacity expansion is worrying and rising crude oil prices are not helping the investor sentiments either. We recommend investors avoid the stock given the challenging fundamentals. Of course, the trend in crude oil prices remains a big wild card and we would become more positive on the stock if crude oil starts correcting.

TAL international (TAL), engaged in the leasing and trading of inter modal containers and chassis, fell over 5% in trade due to a secondary equity issuance of 5 million shares. The secondary issuance is expected to be accretive as management intends to use the proceeds for purchase of additional containers without exceeding the comfort leverage of 75% Net Debt to REA (Revenue Earning Assets). The company has already placed orders for containers worth $400m and is expected to total ~ $1bn for the year given the strong business dynamics of the container leasing industry.

We believe an additional equity offering of $90mn is the favorable choice to maintain the comfortable leverage position. The free float is expected to increase to 18.50mn shares (up ~15% from current float). The stock is trading at a P/E of ~ 11.5x FY11e (post secondary accretion) and is a good buy from a longer term perspective.

Jabil Circuit (JBL), a provider of electronic manufacturing services and solutions in the Americas, Europe & Asia, fell nearly 4% in trading due to profit booking. The company came out with its F2Q11 earnings last week, which were largely in line with expectations and the FQ311 guidance was bullish. For FQ311, the management guided revenues in the range of $4.1-4.2 bln, EPS between $0.55-0.59 and the core operating margin at 4.3%-4.4%.

Going forward, the company management aims to increase the Diversified Manufacturing Services segment to 50% of the revenues, which will further facilitate margin expansion (taking margins closer to the 5% mark). The stock is trading close to 9x FY11 EPS and has the potential to move into double digit P/E multiples. Although there is some uncertainty due to the Japanese disruptions, given its attractive valuations and encouraging business trends, the stock may outperform going forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.