Meritor (MTOR) Expected Earnings Growth: Is It Worth Buying?

The market expects Meritor (MTOR) to report year-over-year earnings growth in the quarter ended September 2018 on higher revenues. This well-known consensus outlook is important in assessing a company’s earnings picture, but it has a significant impact on a company’s short-term share price is the comparison of actual results with estimates.

Shares could move higher if these key numbers meet expectations in the upcoming earnings report, due on November 14. On the other hand, if these key numbers are not met, the stock could fall.

While the sustainability of the immediate price movement and future earnings expectations will largely depend on management’s discussion of business conditions during the earnings call, it is worth limiting the likelihood of a positive EPS surprise.

Zacks Consensus Estimate

This supplier of commercial vehicle and heavy equipment parts is expected to post quarterly earnings of $0.78 per share in its upcoming report, representing a year-over-year change of +25.8%.

Revenue is expected to be $1.03 billion, up 11.5% from the year-ago quarter.

Estimate the trend of change

The consensus EPS estimate for the quarter has not changed over the last 30 days. This broadly reflects how analysts covering the data have collectively re-evaluated their initial estimates during this period.

Investors should note that the aggregate change does not necessarily reflect the direction of estimate revisions by each major analyst.

Price, consensus and EPS surprise

Whisper about earnings

Revisions to estimates prior to a company’s earnings release provide an indication of business conditions in the period in which the earnings are expected to be released. Our proprietary surprise prediction model, the Zacks Earnings ESP, is based on this insight.

The Zacks Earnings ESP compares the Most Accurate Estimates to the Zacks Consensus Estimates for the quarter; The most accurate estimate is the Zacks Consensus estimate, which is subject to change. The idea is that analysts reviewing their estimates just before an earnings release have the latest information, which could potentially be more accurate than what they and other consensus participants had previously predicted.

Thus, a positive or negative ESP reading theoretically indicates the likely deviation of actual earnings from consensus estimates. However, the predictive power of the model is only significant for positive ESP readings.

A positive Earnings ESP is a strong predictor of an earnings beat, especially when paired with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). Our research shows that stocks in this combination deliver a positive surprise nearly 70% of the time, and a solid Zacks Rank actually increases the predictive power of its Earnings ESP.

Please note that a negative ESP reading does not mean a loss of profits. Our research shows that it is difficult to predict earnings growth with any degree of confidence for stocks with negative ESP readings and/or a Zacks Rank of 4 (Sell) or 5 (Strong Sell).

How have the numbers changed for Meritor?

For Meritor, the Most Accurate Estimate is above the Zacks Consensus Estimate, suggesting analysts have recently become optimistic about the company’s earnings prospects. This resulted in an earnings ESP of +13.30%.

On the other hand, the stock currently has a Zacks Rank of #3.

So this combination indicates that Meritor is most likely to beat the consensus EPS estimate.

Does the history of surprising results have any clue?

When calculating future earnings estimates, analysts often consider how well a company has been able to match consensus estimates in the past. So it’s worth taking a look at the surprise history to gauge its impact on the upcoming issue.

For the last reported quarter, Meritor was expected to post earnings of $0.78 per share when it actually produced earnings of $0.89, representing a surprise of +14.10%.

The company has beaten consensus EPS estimates four times over the last four quarters.

Bottom line

Improving or lacking earnings may not be the only basis for a stock’s value rising or falling. Many stocks lose value despite good earnings because of other factors that disappoint investors. Similarly, unforeseen catalysts help many stocks gain despite losing profits.

That said, betting on stocks that are expected to exceed earnings expectations increases your chances of success. Therefore, it is worth checking the company’s Earnings Rank and Zacks Rank before their quarterly release. Use our Earnings ESP filter to find the best stocks to buy or sell before they report.

Meritor seems like a compelling earnings beat candidate. However, investors should also pay attention to other factors if they want to bet on or stay away from these stocks ahead of an earnings release.

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