DETROIT - By most any measure, 1998 was a very good year for Meritor Automotive Inc.
Earnings and sales rose, profit margins improved and three acquisitions bolstered the company's presence in Europe and North America.
Newly independent and newly public, Meritor was largely positioned in two stable markets - light vehicles and heavy trucks. And it was expanding its business in the off-highway and aftermarket segments.
So why did its stock head south?
Last week, Meritor shares traded between $14 and $15, down about one-third in value from where they started the year. (By comparison, the S&P 500 index of common stocks was flat during the same period.) The stock also hovered well below its initial offering price. On Oct. 1, 1997, the first day that Meritor was publicly traded, the stock closed at $23.88.
In an interview last month, CEO Larry Yost expressed frustration with the company's reception on Wall Street. The market valued Meritor 'on the low side,' Yost contended.
'We've delivered in our first year and plan to do so in the future,' he vowed.
TOUGH FOR SUPPLIERS
Meritor may be getting roughed up on Wall Street, but it is not alone among parts makers. Some of the largest publicly held suppliers have watched their share prices swoon since the year began. These parts makers serve two masters with vastly different interests: Wall Street investors looking for fat profits, and customers - automakers and truck builders - demanding annual price reductions on the parts they buy.
Meritor, a public company for 18 months, also is working to establish credibility on Wall Street. Because Meritor has a short track record, investors will closely watch each quarter to see how the company meets the market's expectations.
When, on Jan. 21, Meritor's first-quarter earnings came in at 58 cents per share - about 2 cents below analysts' consensus forecast - the stock lost almost $2 per share in value.
'Any company that has an earnings shortfall gets penalized severely,' said Quinten Nufer, an analyst with Warburg Dillon Read LLC in New York. Still, on Feb. 23, he issued a 'strong buy' recommendation on the stock with a 12-month price target of $26 per share.
For a new company, a declining stock price can be hazardous. If Meritor decides to go back to the markets to raise more capital, it will have to show that its stock has been a good investment.
Meritor, based in Troy, Mich., was part of Rockwell International Corp. until it was spun off in October 1997. In its first fiscal year, the company reported net income before a charge of $166 million on sales of $3.8 billion. Profits rose 38 percent and sales climbed 16 percent for the year.
The earnings gains continued - up 25 percent - in the first quarter, while sales rose a less robust 4 percent.
The company ranks 27th on Automotive News' list of top OEM parts suppliers in North America.
Also in the first quarter, which ended Dec. 31, Meritor said its operating profit margin improved to 7.3 percent from 6.9 percent a year earlier. That news shines in an auto industry where a few powerful customers routinely demand annual price concessions. Profitability, then, is often tied to running factories leaner.
Nufer said Meritor is fundamentally 'very sound,' adding that its second quarter is progressing well. Still, he points out that the light-vehicle (about 40 percent of Meritor sales) and heavy-truck markets (about 60 percent) are both cyclical and have been operating at peaks. The commercial truck business, in particular, has a history of wide boom-and-bust swings.
'Keep in mind, both of these end markets are going gangbusters right now,' Nufer said. 'What (Meritor managers) do once the heavy-truck market slows down will be more indicative of how they operate.'
Andrew Casey, an analyst with Midwest Research Inc. in Cleveland, also would like to see how management performs 'in a little softer environment.' He is currently 'neutral' on the company.
'Some people just want a little more history,' Casey said.
But there isn't much Meritor can do to change Wall Street's current attitude toward car and truck equipment stocks. To many investors, a long-booming market suggests more downs than ups are ahead.
Other auto parts companies getting the cold shoulder from investors this year include TRW Inc., Dana Corp., Lear Corp., Borg-Warner Automotive Inc., Tower Automotive Inc. and Hayes Lemmerz International Inc. As of March 16, all of these stocks had lost value since the year began, according to Bloomberg LP.
Yost said he also was mindful that the market would watch how Meritor handles its recent acquisitions. 'We want to distinguish ourselves on integration,' he said.
In December and January, the company completed the acquisition of three heavy-truck parts companies: LucasVarity PLC's heavy-truck brakes unit based in Dayton, Ohio; Volvo Truck Corp.'s axle manufacturing operation in Sweden; and Euclid Industries, a privately held, Cleveland-based aftermarket parts maker.
In the heavy-truck market, Meritor makes axles, brakes, clutches, transmissions and air suspension systems. For light vehicles, products include wheels, door hardware, sunroofs and seat adjusters.
Earlier this month, Meritor named Paul Ryder, 49, as its vice president of investor relations. Most recently he held the same position at Echlin Inc., a parts maker acquired last year by Dana Corp.
Meritor said Ryder would 'develop and communicate shareowner value-enhancing strategies.'
In other words, he will be ringing a few phones on Wall Street.