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 (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.
