Sell-Side Thinks Meritor Management Merits Increased Confidence

As such, KeyBanc Capital Markets maintains its Overweight rating on the shares of Meritor and raised its price target from $23 to $27. Longbow Research maintains its Buy rating and lifted its price target from $22 to $28.

At the time of writing, shares of Meritor were rallying 5.01 percent to $25.57.

Increasingly Confident In Upside Potential

KeyBanc Capital Markets analysts Brett Hoselton and Irina Hodakovsky said they expect management to raise expectations at its upcoming Analyst Day in December, given their incremental confidence in upside potential to the M2019 earnings per share estimate of $2.84.

"Given multiple drivers of potential EPS upside, such as the better than incorporated commercial vehicle Class 8 production outlook in N.A., new business wins, potential bolt-on acquisitions, and contribution margin at the higher end of targeted range, we believe there is a strong chance management will increase its M2019 EPS target," the firm said.

The analysts attributed the confidence to recent legal and strategic developments, industry tailwinds, new business opportunities and potential acquisitions.

The firm also believes there could be as much as 30-percent upside to the 2019 consensus earnings per share estimate of $2.65. Accordingly, the firm raised its 2019 earnings per share estimate from $2.65 to $3, above the management's stated guidance of $2.84.

Several Recent Actions Prompt Estimate Revisions

Longbow Research said several recent actions such as sale of its JV stake to partner WABCO Holdings Inc. WBC for $250 million, modification to retiree healthcare costs, repayment of debt and acquisition of Fabco's product portfolio have led it to increase its estimates for the company.

Analyst Faheem Sabeiha believes these actions will help Meritor achieve its M2019 incremental revenue target of $450 million. This, according to the analyst, will translate into earnings per share at or above its goal of $2.84. The analyst also thinks the company will achieve its net leverage ratio target of more than 1.5 times after completing the redemption of its 6.75 percent notes.

Longbow Research predicated its Buy rating on the anticipated recovery of the North American commercial truck market from a cyclical decline in 2016 and 2017. The firm feels Meritor is positioned to benefit from higher industry production rates.

"We also expect MTOR to deliver market outgrowth stemming from new business wins and acquisitions under its M2019 strategy along with expansion of its aftermarket and components businesses," the firm said.

The firm raised its 2018 earnings per share estimate by 24 cents to $2.34 and its 2019 earnings per share estimate by 10 cents to $2.94.