Wells Fargo Trims Estimates For Tower International (NYSE:TOWR)

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OEM manufacturer Tower International Inc (NYSE:TOWR) released weak fiscal 2016 guidance last week, and that isn’t inspiring Wells Fargo (NYSE:WFC) analysts, who have subsequently lowered their estimates for the company for the year. The analysts have also stepped down their valuation of the company. Nevertheless, they maintain their market perform rating on the stock.

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Tower’s 2016 forecast

Tower International is looking for fiscal 2016 revenue of about $2.05 billion and adjusted EPS of $3. The company predicts that adverse forex movement will cause a $55 million hit to 2016 revenue. Tower is also guiding adjusted EBITDA at $205 million. Almost all of the metrics Tower has guided for 2016 are below Wells Fargo’s prior estimates.

Wells Fargo previously guided adjusted EBITDA of $219 million for the year. The bank has also vacated its prior EPS of $3.15 for 2016 and now expects EPS of $3, the same as Tower’s own guidance. Additionally, the firm has trimmed its 2017 EPS estimate to $3.25 from $3.45.

Wells Fargo’s valuation estimate for Tower came down to a range of $24 to $26 per share from a range of $30 to $32 per share.

Tower’s 4Q overview

Except for the soft 2016 guidance, Tower International posted a largely positive 4Q2015. Revenue of $493.6 million contracted 2% YoY on a reported basis but actually rose 5% YoY on constant currency terms. The revenue figure exceeded both Wells Fargo’s estimate of $488 million and the consensus target of $489 million. Adjusted EBITDA of $46 million beat Wells Fargo’s and consensus estimates both at $45 million.

Coming to the bottom-line, adjusted EPS of $0.67 comfortably beat the Wells Fargo estimate of $0.61 and the consensus estimate of $0.63.

Tailwinds and headwinds

Despite Tower International’s own tepid 2016 guidance and Wells Fargo’s stepped-down estimates, the firm maintains that the company stands to benefit from OEM outsourcing. The firm also sees the completion of the European business review as a tailwind for Tower.

Nevertheless, financial leverage and uncertainty around free cash flow pose challenges in the near-term.

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