ArvinMeritor, Inc. (ARM) has developed a leading position in most of the markets it serves. Presently, the company is undergoing dramatic cost reductions as well as implementing an impressive global growth strategy. The company is also expanding geographically and outsourcing to low-cost countries.
ARM is likely to benefit from the new business from Hyundai and the latter's focus on emerging markets. However, a downturn in the automotive industry along with production cuts, coupled with rising steel and fuel prices, lead us to rate the shares a Hold.
ArvinMeritor has introduced a new profit improvement initiative Performance Plus to improve its cash flow, increase bottom line and enhance shareholder value. Savings are expected to be $75 million in 2008 and $150 million by 2009. The program has an internal target of achieving $232 million in cost saving actions by the end of fiscal year 2008.
By the end of the first quarter, the Performance Plus team implemented actions that will save $58 million per year going forward. In addition, the company plans to implement more than $20 million of additional annual savings. The company expects to exceed the gross savings target of $115 million.
Currently, ARM's shares are trading at approximately 10.5x our 2008 EPS estimate of $1.04. The company's new profit improvement initiative Performance Plus to improve earnings is expected to deliver benefits in the near future. ArvinMeritor is also expanding its base to low-cost countries in Asia and South America.
However, the weak light vehicle market in North America and high commodity costs make us apprehensive about the stock's performance. Our six-month target price is $12, which is based on 11.5x our 2008 EPS estimate of $1.04. We maintain our Hold rating on the shares of ARM.
Read the full analyst report on ARM.
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