Earlier this month, auto parts supplier ArvinMeritor Inc. (ARM) agreed to sell its Wheels business to focus on its core business. Lochpe-Maxion, a Sao Paulo, Brazil-based producer of wheels and frames for commercial vehicles, railway freight cars and castings, will buy the segment from ArvinMeritor.

The sale is expected to close by the end of 2009. ArvinMeritor’s Wheels business has manufacturing facilities in Limeira, Brazil and San Luis Potosi, Mexico.

ArvinMeritor plans to invest up to $10 million in its commercial vehicle business in Brazil to support expansion into new product segments and new manufacturing technology. Despite the worldwide slump in automotive industry, the company’s production in South America grew by 9% in the last quarter. Meanwhile, the company is also pursuing the sale of its light vehicle systems business, which includes the body systems unit.

ArvinMeritor has a leading position in most of its markets. The company is making drastic cost reductions through its “Performance Plus” initiative. It is also expanding geographically and outsourcing to low-cost countries.

However, difficult conditions in North American and West European automotive markets are primary concerns for the company. The downturn in the auto industry makes us apprehensive about the near-term prospects for auto suppliers. ArvinMeritor has withdrawn its fiscal 2009 financial outlook and suspended its quarterly dividend. High leverage and the risk of non-compliance of the debt covenants due to deteriorating profits are a matter of concern.

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