Meritor Is 'Executing In A Difficult Environment,' So Give It A Look Investors

In a report published Friday, Longbow Research analyst Neil Frohnapple upgraded shares of

to Buy from Neutral with a newly established $17 price target as the company is positioned to deliver faster earnings growth versus its peers. According to Frohnapple, Meritor now has a proven track record of delivering strong earnings growth in a "challenging" end market while also facing top-line declines. The company has benefited from new contract wins, market share recapture at DTNA and internal margin initiatives. "We expect these positive factors along with stronger European commercial truck demand to more than offset a potential decline in Class 8 North American builds next year," Frohnapple wrote. "We think the recent PACCAR business wins (rear and front axles) could be just the beginning of additional market share gains and share repurchases could also drive upside to numbers." Frohnapple continued that Meritor's balance sheet and cash flow represents a "good news story" as the company has already achieved a net debt reduction target and expected to generate a "strong" free cash flow of $110 million in fiscal 2015. Meanwhile, management plans on completing a $210 million share repurchase program by September 2016. Looking forward, the analyst is expecting Meritor to achieve a 2016 EBTIDA margin target of 10.0 percent on $3.75 billion on revenue. This compares favorably to the the company's own projections that it needs to see $4.5 billion of revenue to generate a 10.0 percent margin. Finally, Frohnapple is projecting the company to earn $1.75 in fiscal 2016 and $1.95 the following year. However, these projections do not include the company's share repurchase program which could provide as much as $0.10 of earnings per share upside next year.