ArvinMeritor Inc. (ARM) reported its results for second quarter of its fiscal 2010 ended March 31, 2010 on May 4, beating the Zacks Consensus Estimate by a significant margin of 16 cents per share. However, the market failed to react very positively, with share prices fluctuating in the subsequent days, mostly in a downward direction.
Analysts declined to be encouraged by the results as well, given the company’s weak outlook. Below we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for both short-term and the long-term outlooks for the stock.
Earnings Report Review
ArvinMeritor outdid the Zacks Consensus Estimate due to strong performance in the emerging markets and enhanced commercial vehicle volumes in North America and Europe. Revenues in quarter improved 25% to $1.2 billion. EBITDA (adjusted) doubled to $64 million from the same period last year.
Revenues in the Commercial Truck and Light Vehicle Systems (LVS) segments rose impressively by 31% and 51%, respectively. However, revenues in the Aftermarket and Trailer segment slipped 5% due to lower volumes of certain military programs.
Compared to the second quarter of fiscal 2010, ArvinMeritor has projected revenues to be flat and income per share (before special items) to be lower, mainly due to the sluggish growth in the North American and European truck market. Moreover, the company’s aftermarket and trailer business has yet to recover from the downturn in 2009. Overall, the company expects a steady growth in its business not until 2011-12.
The company anticipates free cash flow (before factoring restructuring-related outlays) to be breakeven, and total free cash flow to be modestly positive for the third quarter of fiscal 2010. This was due to the greater working capital needs in the third quarter.
(Read our full coverage on this earnings report: Good Quarter for ArvinMeritor)
Earnings Estimate Revisions – Overview
Estimate revisions have been ambiguous since the earnings were published. Share price movement was moderately unfavorable. Let’s move into the earnings estimate details.
Agreement of Estimate Revisions
The table below depicts a not very encouraging picture among analysts regarding the outlook of ArvinMeritor’s earnings in fiscal 2010. Out of 7 analysts covering the stock, 2 have revised downward their estimates for fiscal 2010 while only one analyst has revised upward.
However, the trend reverses in fiscal 2011. Two analysts have revised their estimates upward while one moved in a downward direction. This trend in estimate revisions clearly shows a turnaround in the company’s overall business and earnings, but not until the next fiscal year.
Magnitude of Estimate Revisions
Earnings estimates for fiscal 2010 have raised from 28 cents to 32 cents since the earnings announcement. The trend is similar for fiscal 2011. Estimates are up by 3 cents from $1.51 to $1.54 for next fiscal year. This implies a cautious approach of the analysts, who have valued the stock at a modest premium.
ArvinMeritor in Neutral Lane
ArvinMeritor’s cost reduction measures, collectively known as Performance Plus, have been successful. In fiscal 2009, the company achieved cost savings of $195 million in its core businesses under the program.
We expect the company to return to a good shape once it has completely shed its LVS business — which is exposed to cyclical aberrations in the auto industry — by the end of this year. At the end of fiscal 2009, the company has already reduced the overall LVS business to 25% of total sales.
However, ArvinMeritor has a high customer concentration. The company’s top 5 customers contribute 53% of sales, which jeopardizes the company significantly in view of buyer power. Further, the company is yet to recover from the slow truck markets in North America and Europe.
These have led us to reiterate our Neutral recommendation on the stock for the long term and Zacks #3 Rank, or Hold, for the short term.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
Read the full analyst report on “ARM”
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