While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Meritor Inc (NYSE:MTOR) rallied 2% Thursday after Piper Jaffray initiated coverage on the commercial vehicle equipment company with an overweight rating.
So what: Along with the bullish call, analyst Alexander Potter planted a price target of $15 on the stock, representing about 18% worth of upside to Wednesday's close. So while momentum traders might be turned off by Meritor's price weakness in recent weeks, Potter's call could reflect a sense on Wall Street that its near-term growth prospects are becoming too cheap to pass up.
Now what: According to Piper, Meritor's short-term risk/reward trade-off is rather attractive at this point. "We think there's some risk to the longer-term story -- mostly regarding MTOR's ability to materially out-grow the underlying truck market -- but over the next 1+ year MTOR's biggest markets (North America and Europe, which represent >75% of sales) are likely to grow nicely due to cyclicality," said Potter. "We think MTOR's 'M2016' plan will allow the company to lever this growth and deliver strong EBITDA conversion. As a result, we think upward guidance revisions are more likely than 'misses.'" When you couple Meritor's still-hefty debt load with the risks surrounding its long-term competitive position, however, conservative Fools would probably do well to maintain their distance.
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Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.