There is now a clear contrast between the passenger and commercial vehicle industries, and there is full concern that the former is peaking, while the latter is bottoming out more and more hope.
As a business component participant, Meritor is optimistic about improving the market conditions (NYSE:MTOR)
Although 2017 may still be a challenging year.
Meritor is more interesting that management has set bold targets for growth over the next few years, including a 20% performance relative to the underlying market.
Although I don\'t believe Meritor will get there without M & A (
I don\'t simulate it)
In recent years, it has been creating better performance records for itself, and I do not deny the possibility that the company will do better than expected.
That is to say, today\'s price seems to have produced a meaningful improvement for the company, waiting on a risk/return basis, hoping for a temporary interruption or disappointment, creating a more appropriate entry price, this may make more sense.
Compared to many other companies in the automotive parts sector, Meritor\'s business is very simple.
The company is mainly a supplier of commercial vehicle axles and brake
s and other products (
Power System, chassis, suspension)and markets (
Also consider mixing.
In the axle, Meritor is the leading supplier of heavy duty vehicles
Truck drive shafts in North America, Europe, South America and some Asia-Pacific (
India and Australia)
And the company also has strong strength in the brake of commercial vehicles (
One in North and South America and two in Europe).
Most of the business comes from heavy lifting.
Truck market because the company currently has a small share of the medium truck marketduty trucks (
About 15% share in North America)
And a smaller presence on the sidelines.
Road vehicles such as construction, ag and mining equipment (
Less than 5% worldwide, few in North America). Dana (NYSE:DAN)
American Axle (NYSE:AXL)
In terms of its core axle business, both are competitors to Meritor, but neither is committed to the commercial vehicle market as Meritor (
Although Dana is not there.
Large highway business).
While I think Dana did a better job of product innovation, I wouldn\'t say Meritor was just standing at pat-
Like Dana, Meritor has been rolling out lighter, more fuel-efficient Axle products, and the company has been putting resources into developing electric drive systems for electric and hybrid commercial vehicles.
Nevertheless, competition with internal procurement (Like Daimler (OTCPK:DDAIF)Detroit Axle)
This is still an important competitive factor for Meritor, but auto parts suppliers (
Especially Commercial and off-siteroad suppliers)
Just deal with it.
In terms of braking of business, Meritor and brebo (OTC:BRBOF), Knorr-
Knoll, Webster (NYSE:WBC)
Although the company also has a joint venture with WABCO to produce advanced safety equipment such as ABS and automatic anti-collision systems.
After successfully completing the company\'s \"M2016 plan\" strategic plan, Meritor is now working on a new set of goals (\"M2019\")
It aims to bring more benefits to shareholders.
In addition to seeking continuous profit improvement and financial deleveraging, management wants to generate 20% of its revenue from its underlying market.
In addition to new products and new markets, Meritor hopes to achieve this by expanding its relationship with key customers, expanding its component business and increasing its after-sales market share.
I have questions about whether management can achieve these goals, especially if mergers and acquisitions are not involved.
New products include mid-sized car shafts
Target market worth over $1 billion-tariff Market (
Where the company and its current shares are limited (around 15%)
And for off-Road Market (
Potential opportunities worth close to $5 billion).
Actually, I\'m a little optimistic about off-site trading.
Although in many cases Meritor has to convince the original equipment manufacturer to abandon the internal purchase, the company\'s knowledge
How to transfer in heavy trucks.
Establish its single
The digital share of the air disc brake market will also bring Meritor tens of millions of dollars in incremental revenue opportunities.
As for expanding the component business, the market opportunity is there, but I\'m not sure how much the company can do internally in a relatively short period of time.
New market opportunities include expanding business in China.
Although the axle business performed well in markets such as India, the company\'s position in the Chinese truck market was not so good.
Existing competitors (like Weichai (OTCPK:WEICY))
But I do think it\'s a market where Meritor can reasonably expect some success.
The company\'s manufacturing policy close to the market should help ease some price/cost issues in competition with domestic suppliers in China.
For me, expanding the business with existing customers is a more interesting debate.
Even though Daimler has his own
Meritor still gets meaningful revenue from Daimler, the company has shown that it may be opportunistic to get business from Dana of PACCAR (NASDAQ:PCAR)
When Dana\'s supply chain restructuring efforts hurt its ability to meet PACCAR needs.
However, what I am concerned about here is that I am not sure if Meritor will be able to provide the technology and capabilities that its potential customers cannot match. house;
I don\'t want to say \"axis is axis\" but I think it\'s a challenge for management to convince more people
Sourcing potential customers, incorporating Meritor into the portfolio.
This is a challenging era in the commercial vehicle market (
At least in North America, Europe and South America)
But I found that Meritor\'s management is usually very realistic about the market situation, and almostterm prospects.
More importantly, while 2017 will not be a great year, I think the market will start to improve in 2018 and provide growth potential again.
This may make Meritor a fun game relative to those parts suppliers who target passenger cars.
While Meritor\'s main market may be bottoming out, it seems unlikely that the passenger market will continue to grow in the short term.
I also noticed that Meritor might be out there to see an opportunity for \"one stone and two birds\"
As markets such as construction, mining and ag begin to recover, road space can win business if it does.
As I said, I don\'t think Meritor can achieve its revenue growth target, but I believe it can keep the adjusted EBITDA profit margin at double digits.
My modeling assumption works for a long time
Long-term revenue growth of 3% to 4%, I believe that the company\'s efforts in recent years to improve profit margins and operational efficiency will begin to translate into better free cash flow production.
Although Meritor has a poor record of free cash flow (
In the past decade, it has been very common in this field)
I think it\'s improved to 3-
The range of 5% is possible on a continuous basis, which can be driven into high-single-
FCF is growing rapidly.
After deducting these cash flows, Meritor looks pretty valuable to me today.
The stocks have performed very well in the past year, up nearly 60% from the election.
While I know that many investors may think that the new government will drive policies that will drive better economic growth, I think the real outlook for the commercial vehicle market is not as good as the stock trend shows.
So I think the expectations now may be too high and I note other valuation methods like EV/EBITDA and margin-
The drive for electric vehicles/revenue shows quite a bit of optimism.
LineI at the bottom is optimistic about Meritor\'s prospects for taking advantage of medium market opportunities
Trucks and non-motor vehicles
I think the management can do more to improve the profit margin and the financial leverage of the company (
Too much debt today).
That said, it is difficult for me to align the recent stock movements with the basics, so I tend to wait this time, hoping that enthusiasm will disappear and lead to a better balance of risk/return for the stock.
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Disclosure: I/we have no positions in any of the stocks mentioned and no plans to start any positions in the next 72 hours.
This article was written by myself and expressed my views.
I received no compensation (
In addition to Seeking Alpha).
I have no business relationship with any stock company mentioned in this article.
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