Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Meritor: A Perfect Long Candidate

|About: Meritor, Inc. (MTOR)
Summary

Meritor’s share price for the past one year has risen by 2.8%, whereas the industry’s average share price has fallen by -9.5%.

Meritor is expanding its footprint across emerging markets such as India and China.

Meritor over the next three years shall be introducing 20 new products into its business lines.

    The key question most followers of Meritor (NYSE: MTOR) will be having is whether the stock is a long term buy. Therefore, to answer this question I shall scrutinize the fundamentals the company which will help determine whether investors ought to purchase this equity. We shall firstly undertake a general overview of the company in which we will briefly look at its two key operating segments. Once we are done with that, we will analyze the reasons why investors should buy this stock plus the firm’s financial health. Lastly, we shall look at the share price history. I am doing this, as I believe Meritor is on the brink of a price rise.

    Company overview

    Meritor Incorporated is a global manufacturer and supplier of automotive parts and its current customer base spans more than 70 countries. The firm manufactures a wide range of integrated systems, modules and components that are used in both commercial and specialty vehicles.

    In the end of 2017, the company’s management reorganized its operating segments into two new reportable segments. The first segment deals with the manufacturing of commercial truck and trailer parts. Moreover, this segment is the firm's major revenue generator as it contributed for 80% of the total revenue. In the third quarter of 2018, the sales of this segment rose by 24% on a year-over-year basis to $904 million. Furthermore, this segment focuses on supplying drivetrain systems and its components, along with axles, drivelines and suspension systems. Additionally, most of the segment’s revenue is generated from North America, South America and Asia Pacific.

    The second segment of Meritor deals with aftermarket and industrial sales. As of the third quarter of 2018, this segment contributed for 20% of the firm’s total revenue. The segmental revenue came in at $273 million, which was a 15% rise from the prior year’s quarter. Moreover, this segment is responsible for manufacturing and supplying brakes, suspension parts and other refurbished auto parts for commercial vehicles. Furthermore, it also supplies a wide range of undercarriage products and related systems for trailers.

    Reasons to Buy the Stock

    The first and the foremost reason investors ought to give this stock a second look is due to Meritor’s impressive financial health. The stock for the past one year has risen by 2.8%, whereas the industry’s average share price has fallen by 9.5%. Moreover, Meritor has raised its guidance levels as it expects the revenue to rise to $4.1 billion from a prior estimate of $4 billion. The reason behind the upward revision is due to a spike in the company’s global sales. Additionally, the management expects an increase in the adjusted revenues to the range between $2.9 to $3 per share. The prior estimate for the adjusted revenues was between $2.7 and $2.85. This rise in guidance levels shows the level of optimism investors ought to maintain as the company’s financial performance is excellent. Lastly, the fact that the company’s share price had a positive rise, whilst, the industry average had a negative downturn reiterates the fact that Meritor has a positive future. This shall result in the share price having a rally in the latter part of 2018, as investor confidence is presently high.

    The second reason investors ought to consider this stock is due to Meritor expanding its footprint across Europe and emerging countries such as India and China. The management opted for expansion into these markets as the scope of growth is immense. Moreover, I believe the firm’s expansion into India will be very beneficial, as the level of demand for auto parts in India is exceptionally high. Furthermore, Meritor will be investing in several joint ventures so as to rapidly increase its capacity across its axle and brake manufacturing divisions. All this indicates to a very positive future for the company as markets such as India and China will unlock a host of opportunities for the firm. Moreover, I as an analyst am upbeat over the fact that Meritor is undertaking its expansion through joint ventures. I say that as this shall significantly reduce its risk levels plus it’s local partner will have knowledge of what the market specifically needs. This is very important as it will provide the company with an upper hand from its international rivals operating in the same markets. This in turn will allow Meritor to fill a market gap.

    The third reason investors should pay keen attention to Meritor is due to the company’s new M2019 business plan. Under the plan, the company plans to develop several new products which shall help it secure contracts for the supply of line haul and heavy haul axles and brakes. These contracts are expected to contribute upto $160 million in revenues in 2019. Moreover, to meet its goals under the new plan, the company has acquired the assets of AA Gear & Manufacturing. This acquisition will aid Meritor in securing a wider customer base plus a high level of industry specific technical expertise. Lastly, Meritor has also expanded its aftermarket and industrial division through the purchase of Fabco Holdings. This acquisition allows Meritor to manufacture several new products through the technology Fabco Holdings has. This in turn will result in a significant boost in the company’s sales down the road.

    The fourth reason investors should buy this stock is due to Meritor’s upcoming product line. Meritor over the next three years plans to introduce 20 new products. This will help the firm in boosting its revenue by more than 20% than the industry’s average revenue level. Moreover, it will also help the firm in raising its earnings per share to $1.25 by the year 2019. Furthermore, this year Meritor launched numerous types of bearings with seal kits that have been very well received by the market. These new products are expected to enable the firm to grow its market share significantly in the axle carrier business line. Lastly, the firm has commenced the manufacturing of electric drivetrains and connectivity systems which will be utilized in a wide array of products. This service will allow customers to choose individual items as per their specification and budget. This will greatly help in improving sales as clients get a bespoke product in their chosen price range.

    Risks

    Every business has certain risks and Meritor is not immune to them. The key area of concern I have on the risk front is due to the company’s global presence as it makes it vulnerable to inherent risks firms operating in foreign countries face. The risks on this front, primarily arise from trading regulations and economic uncertainty. This risk is high for the firm as the firms three major foreign clientele account for approximately 49% of its total sales. The three clients are AB Volvo, Daimler AG and PACCAR. Thus, the ongoing trade war can significantly damage the firm’s sales in the coming future. However, I still believe investors can be optimistic about Meritor as it has so far have not been affected by the trade tensions. 

    Financial Health of Meritor

    The company’s adjusted earnings for the third-quarter of 2018 came in at 89 cents per share which beat the market estimate of 78 cents. Additionally, the adjusted income came in at $80 million which is higher than the prior year’s value of $60 million. Moreover, the firm’s revenue stood at $1.13 billion which is a 23% rise on a year-over-year basis. The revenue also surpassed the market estimate of $1.06 billion. The key reason there was an increase in revenue was due to a higher level of demand seen in the firm’s commercial truck division. Moreover, the company also managed to boost its market share through several acquisitions. The company’s adjusted EBITDA rose from $103 million a year ago to $135 million. Moreover, the EBITDA margin stood at 12% against a prior level of 11.2%. This is a very positive fact, as it shows the firms revenue level is growing at a healthy pace.

    The company’s segmental results were also very positive. The sales revenue from the commercial truck and trailer division rose by 24% on a year-over-year basis to $904 million. When analyzing the firm’s financials, we note that the rise in sales was largely driven by higher global production levels which in turn caused a spike in the firm’s auto part sales. This segment’s adjusted EBITDA rose from $71 million a year-ago to $103 million. This reinforces the fact that the company’s fundamentals are in an excellent condition which will have a positive impact on its share price.

    The firms aftermarket & industrial division’s sales revenue rose to $273 million, which is a 15% rise on a year-over-year basis. Moreover, this division’s EBITDA came in $35 million against a prior year’s value of $31 million. The rise in the EBITDA was primarily due to a more favourable impact of changes in the retiree’s medical benefits.

    The firm is in a much better financial position than what was seen in the prior year. Meritor’s cash and cash equivalents came in at $100 million against a prior value of $88 million. The company’s long term debt level fell from $750 million to $728 million. Moreover, the cash inflow from operating activities came in at $191 million compared to a prior cash inflow of $136 million in the same period of a year ago.

    Share Price Overview

    Take a look at the past one-year chart of Meritor below, with my added notes:

    Meritor, Inc Daily Chart Source: Seeking Alpha

    During the past one year, the Meritor's share price has fallen by 42% which has left numerous investors licking their wounds. However, I now see a change in the company’s fortunes as the stock is at a major support level at $16 (red). Hence, traders can expect some sort of a bullish reversal at this price point. However, if the $16 level were to break, then this would lead to lower prices.

    Thus, I would advise traders to enter a long position at or around $16 with a stop being placed right under the level. But, if the share price were to break below the support level, then a short position could be entered instead.

    Conclusion

    On the whole, I am confident that Meritor is a share worth buying at the moment as the future of the company appears to be extremely positive. This is partly due to the firm’s excellent financials which indicates that the firm shall be having exceptional earnings in the future. The second factor that will boost the share price rise is the acquisitions being made by the company coupled with the joint ventures it is undertaking.

    Thank you for reading the analysis and do share any thoughts you may have in the comments section.

    Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MTOR over the next 72 hours.

    I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.