ArvinMeritor (ARM)

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"ArvinMeritor, Inc." (NYSE: ARM) manufactures auto parts for commercial trucks and trailers. The company's 10 largest customers, including AB Volvo (VOLV) and Chrysler, accounted for 59% of revenue in fiscal 2007. ArvinMeritor had small sales growth and increasing losses from 2005 - 2007, reflecting a slowing of the truck and trailer market in North America as gas prices hit this sector of the automobile market the hardest, a market upon which the auto parts industry depends heavily. In fiscal 2007, the firm generated $6.45 billion in sales and $220 million in losses, a 0.5% increase in sales and a 25% increase in losses from 2006^[1].

As Emerging Markets boom and the American auto market flattens, ArvinMeritor is looking to Asia for growth opportunities. In the last 3 years, the firm has begun to ween itself off of the lackluster North American auto market, with just 50% of 2007 sales coming from North America, a decrease from 57% in 2006. The weakening US Dollar has affected ARM and other auto parts manufacturers by boosting ever growing international sales. Meanwhile, a rise in key input prices, including aluminum and steel, could shrink bottom line margins and topline demand if the company passes part of the price increase on to its customers ^[2].

[edit] Company Overview

Headquartered in Troy, Michigan, ArvinMeritor supplies automotive parts to various customers in North America, Europe and in other parts of the world. Its core business (almost 70% of 2007 revenues) is providing parts and equipment for manufacturers of trucks and heavy trailers. These automotive parts are primarily emissions systems, aperture systems, drive train systems and undercarriage systems. The company operates 75 manufacturing facilities in 22 countries around the world as of the end of fiscal 2007 (September 30, 2007).

ArvinMeritor serves original equipment manufacturer (OEM) customers worldwide - examples of OEMs include General Motors (GM), Ford and Chrysler. Chrysler, for example, will purchase a part from ArvinMeritor and sell the part in one of its cars under the Chrysler brand. Aftermarket sales, on the other hand, refer to situations where someone, like a mechanic shop, orders a car part directly from ARM to repair a vehicle. Thus the company is tied to both original equipment production (OEM) and aftermarket trends.

The firm generated $6.45 billion in revenue, $53 million in operating income, and $220 million in net losses in fiscal 2007. The North American market contributed 50% of fiscal 2007 revenue and Europe 38%. Its 10 largest customers accounted for approximately 59% of revenue during fiscal 2007^[3]. The company operates through two main segments:

• Commercial Vehicle Systems (CVS) - Accounted for 67% of revenue in fiscal 2007. This segment makes undercarriage and drivetrain systems (axles and drivelines, braking systems, suspension systems, and exhaust) for medium- and heavy-duty trucks and trailers. It also includes ride control and filtration products and specialty vehicles for OEMs and the commercial vehicle aftermarket. AB Volvo (VOLV) and Chrysler are the two largest customers, with 17% and 12% of this division's sales, respectively.

• Light-Vehicle Systems (LVS) - Accounted for 33% of fiscal 2007 revenue. This segment supplies aperture systems (roof and door systems, and motion control products), and undercarriage systems (suspension and ride control systems, and wheel products) to original equipment manufacturers (OEMs). DaimlerChrysler was the segment’s largest individual customer at 13% of fiscal 2006 revenue, followed by General Motors and Volkswagen with 9% each, and Ford with 7%^[4].

^[8]

[edit] Trends & Forces

[edit] Rising Steel Prices lower earnings

As an auto parts manufacturer, ArvinMeritor uses a variety metals in the production of its products, including aluminum and steel. Hot-rolled steel in the United States is one of the most common types of steel input for auto suppliers. While prices peaked in September 2004 at $816 per metric ton, steel prices remain significantly higher than historical levels^[9]. As metal prices rises, so do the company's costs, resulting in declining earnings.

[edit] European and Emerging Markets sales offset a weakening U.S. auto market

Demand for auto parts is driven by new car sales. The percentage of sales from North America has diminished significantly in the last 3 years as the North American auto parts market flattens, a reflection of the declining U.S. auto market. In 2007, North American sales were 50% of total sales, a record low in recent years. As Emerging Markets like China, who recently joined America as the largest purchasers of automobiles, demand more vehicles, demand for ArvinMeritor's parts also increase. Growing demand in emerging markets has helped ArvinMeritor avoid drastic decline in sales and earnings. In Fiscal 2007, industry-wide production of Class 8 and Class 5-7 trucks declined roughly 35% and 15%, respectively. Historically, Class 8 orders have been a key driver of momentum in ARM earnings.

[edit] A weak dollar bolsters ever-growing international sales

With 50% of 2007 sales coming from outside of North America, ArvinMeritor has become increasingly dependent on fluctuations in the Dollar. As the dollar declines, foreign sales translate into higher dollar amounts, a boost to the company's earnings. In 2007, positive currency effects resulted in a $220 million boost to sales.

[edit] Reliance on small number of customers limits ArvinMeritor's bargaining power

ArvinMeritor's small customer base means that a few big players can demand ever lower prices, forcing the firm to agree to more price cuts in their products, or else risk losing a significant portion of its business. With North American automobile sales slowing there is a decrease in demand for auto parts, giving the buyers leverage in their negotiations with ArvinMeritor - which in turn has little negotiating leverage because it depends so much on a few key customers. Its 10 largest customers accounted for approximately 59% of revenue during fiscal 2007. AB Volvo (VOLV) and Chrysler, for example, accounted for 17% and 12% of the Commercial Vehicle Systems' sales, respectively.

[edit] Competition

A majority of ArvinMeritor's sales are to manufacturers of heavy-duty trucks and trailers^[10]. Dana Corporation (DCNAQ), ArvinMeritor’s key competitor in truck axles, driveline products, and braking systems, filed for Chapter 11 bankruptcy protection on March 3, 2006. This represents an opportunity for ArvinMeritor to gain in market share in those products as Dana endures bankruptcy^[11].

ArvinMeritor’s key competitors in emissions technologies are:

• Tenneco
• Faurecia
• Eberspaecher
• Benteler.

Of the four, Tenneco Automotive (TEN) and Faurecia are publicly held, though both offer a wider range of automotive-related products in addition to emissions products. Donaldson and Cummins also offer competing products, with a greater emphasis on commercial vehicles^[12].

Key competitors in roof systems include:

• Webasto
• Inalfa
• Aisin

ArvinMeritor provides OEMs in North America and Europe with sunroofs and sunroof systems for cars, trucks, and SUVs, with these systems generating roughly 14% of ArvinMeritor’s 2006 sales^[13].

Competitors in door systems include:

• Brose
• Intier
• Kiekert
• Valeo
• Aisin
• Grupo Antolin^[14].

ArvinMeritor is a leading supplier of steel wheels for light- and medium-duty vehicles, which it designs, manufactures, and markets under the Fumagalli brand name. The company is one of a limited number of wheel manufacturers with the capability of producing steel wheels in a full range of sizes from 13 to 22.5 inches in diameter. Competing wheel suppliers include:

• Hayes-Lemmerz
• Topy
• Accuride
• CMW.

Chinese manufacturers, however, have also begun penetrating this market, pulling market share away from ArvinMeritor^[15].

ArvinMeritor lags behind many of its competitors in earnings in relation to sales, or earnings margins, a measure of operational efficiency. However, it is important to note that most of its peers manufacture the entire vehicle or machine (or a major part of one, in the case of engine maker Cummins) as opposed to individual components or systems for the vehicle with lower profitability, as ArvinMeritor does. In the graph below, only Accuride, Eaton, and Tenneco focus on individual components as ArvinMeritor does^[16].

^[17]

[edit] Notes

1. ↑ ARM 2007 10-K
2. ↑ ARM 2007 10-K, Item 1
3. ↑ ARM 2007 10-K, Item 1, pg. 10.
4. ↑ BearStearns Initiate 08/21/2006:ARM
5. ↑ ARM 2007 10-K, Item 7, pg. 27 - 30.
6. ↑ ARM 2007 10-K, Item 7, pg. 27 - 30.
7. ↑ ARM 2007 10-K, Item 7, pg. 27 - 30.
8. ↑ ARM 2007 10-K, pg. 85.
9. ↑ BearStearns Initiate 08/21/2006:ARM
10. ↑ ARM 2007 10-K
11. ↑ BearStearns Initiate 08/21/2006:ARM
12. ↑ BearStearns Initiate 08/21/2006:ARM
13. ↑ BearStearns Initiate 08/21/2006:ARM
14. ↑ BearStearns Initiate 08/21/2006:ARM
15. ↑ BearStearns Initiate 08/21/2006:ARM
16. ↑ BearStearns Initiate 08/21/2006:ARM
17. ↑ BearStearns Initiate 08/21/2006:ARM