(By Kevin Donovan) Meritor Inc. (MTOR), a supplier of parts that makes the world of internal combustion run, has survived the great recession, returned to profitability and has the potential of rewarding shareholders with faith that global economic gears can keep grinding forward.
The share price has fallen from a recent high of $8.67 in March to Wednesday's close of $5.35, despite steady guidance and upside surprises in earnings. As a result, valuation has fallen to levels that should invite attention from investors looking for small-cap value.
At $5.35, Meritor shares trade at a forward PE of just 3.39 on analysts' consensus EPS estimate of $1.58 for fiscal year 2013 (ending September). By comparison, the small-cap Russell 2000 index sports a forward PE of 16.83.
Caught in the recent hand-wringing over the potential for global recession sparked by the May U.S. jobs report and Europe's daily drama, Meritor is trading far below what we think it deserves. Using a forward PE midway to the Russell 2000 yields a price target of $15. A multiple of 5.60, one-third that of the Russell 2000, values Meritor at $8.86. Meritor shares have traded in a range of $3.24-13.46 in the past 52 weeks. The stock is up 0.52% year to date and down 63% in the past year.
Meanwhile, Meritor continues to execute. Last month, the company reported fiscal second-quarter EPS of $0.33, easily beating the mean estimate of $0.25. Adjusted EBITDA was $95 million, up 11% from the year-ago period. EBITDA margin was 8.2% vs. the 2011 F2Q margin of 7.0%.
Revenue, however, fell 1% from F2Q11 to $1.16 billion, which missed analysts' expectation of $1.19 billion. Commercial truck parts sales were flat and industrial segment sales were down. Margin expansion more than made up for the shortfall, as Meritor's rationalization of its operations and focus on the commercial and industrial markets continued to pay off. In the latter, Meritor cited a favorable mix of military sales that boosted EBITDA despite the revenue decline.
Despite the revenue shortfall in the fiscal second quarter, the company reiterated fiscal 2012 guidance of $4.8 billion in revenue, adjusted EBITDA margin of 8.2-8.6% and EPS in a range of $1.08-1.39.
"We are executing on our 2012 priorities and key initiatives," CEO Chip McClure said in a press release. "Our market volume outlook remains positive, and while there could be some changes across the regions compared to our original planning assumptions, we do not expect these changes to significantly impact our overall fiscal year 2012 revenue guidance. We continue to focus on … strategies resulting in improving EBITDA margins."
Meritor, Inc. is a global supplier of drivetrain, mobility, braking and aftermarket solutions for commercial vehicle and industrial markets. The company serves commercial truck, trailer, off-highway, defense, specialty and aftermarket customers in more than 70 countries. Meritor is based in Troy, Mich., and has manufacturing facilities, engineering centers, joint ventures, distribution centers and global offices in 19 countries.