Cooper Tire & Rubber Co.
/ (CTB-NYSE)/ Equity Research / CTB | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 12/05/2011
Current Price (12/02/11) / $13.48
Target Price / $14.00
SUMMARY
Cooper Tire & Rubber is largely dependent on imports, which may cause the company to suffer from unfavorable currency exchange rates and a shrinking local market. In addition, intensifying competition and soaring material costs can be regarded as major threats for the company. In the last reported quarter, earnings per share exceeded the Zacks Consensus Estimate by $0.06 per share. But the company is making concerted efforts to reduce cost and increase efficiency in each of its plants in order to mitigate the pressure on margins. Moreover, the North American operation is also performing well. Considering the company’s endeavors for overall improvement, we have upgraded our recommendation on shares of Cooper Tire from Underperform to Neutral and set a target price of $14.00./ Equity Research / CTB | Page 1
SUMMARY DATA
52-Week High / $26.9852-Week Low / $10.02
One-Year Return (%) / -37.00
Beta / 2.42
Average Daily Volume (sh) / 649,230
Shares Outstanding (mil) / 62
Market Capitalization ($mil) / $840
Short Interest Ratio (days) / 3.66
Institutional Ownership (%) / 85
Insider Ownership (%) / 1
Annual Cash Dividend / $0.42
Dividend Yield (%) / 3.12
5-Yr. Historical Growth Rates
Sales (%) / 5.1
Earnings Per Share (%) / 28.0
Dividend (%) / 0.0
P/E using TTM EPS / 9.9
P/E using 2011 Estimate / 12.3
P/E using 2012 Estimate / 7.5
Zacks Rank*: Short Term
1–3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Average,
Type of Stock / Mid-Value
Industry / Rubber-Tires
Zacks Industry Rank * / 13 out of 267
OVERVIEW
Cooper Tire & Rubber Company (CTB), headquartered in Findlay, Ohio, manufactures and markets tires and related products. The company has more than 60 manufacturing, sales, distribution, technical and design facilities located in 10 countries across the world. Cooper is the ninth largest tire company in the world and is also one of the 350 large companies in America.
Cooper Tire's operations are organized into two geographical business segments: North American Tire Operations (about 72% of total revenue came from this business in the first nine months of 2011) and International Tire Operations (28%). About 60%-65% of the tires are meant for vehicles and the balance for SUVs/light trucks.
In the North American Tire Operations segment, Cooper Tire produces automotive, motorcycle and truck tires, tread rubber and equipment. The manufacturing facilities are located in Ohio, Georgia, Mississippi, and Arkansas. The segment focuses on passenger and light-truck replacement tires, and caters to independent tire dealers, wholesalers and retail chains in the U.S. The group is mainly tied to the aftermarket for tires and parts, and not selling directly to original equipment manufacturers (OEMs).
In the International Tire Operations segment, Cooper Tire produces passenger cars, light trucks, racing, and motorcycle tires in the U.K. and China. In the U.K., the segment produces passenger car, light truck, racing and motorcycle tires in its Wiltshire plant and markets these products primarily to dealers in the domestic market, continental Europe and Scandinavia.
In China, the International Tire Operations segment manufactures passenger car, bias, radial light, medium truck and off-road tires through its joint ventures with Kenda Rubber Industrial Co. of Taiwan (Kunshan plant) and a Chinese company, Chengshan (Shandong) Tire Co. In the joint venture with Chengshan (Shandong) Tire Co., Cooper Tire invested in two projects – Cooper Chengshan (Shandong) Passenger Tire Co. Ltd and Cooper Chengshan (Shandong) Truck Tire Co. Ltd – acquiring 51% ownership in each. The manufactured products from China are exported to Europe and North America and sold through dealers in the domestic market.
REASONS TO BUY
Cooper Tire’s North American Tire Operations segment continues to outperform the total industry shipments in the U.S. Owing to an upward pricing pressureand improved demand in the Ultra High Performance, light truck and commercial tire product lines, total light vehicle tire shipments of Cooper's North American segment increased 1.1% in the U.S., versus the total industry shipment increase of 0.2% (as reported by the Rubber Manufacturers Association).
Cooper Tire’s North American Tire Operations segment develops high-performance products to cater to the current market demand. By improving the product mix, these products will improve profitability. The company is working constantly to increase its capacity in order to meet the rising demand for replacement tires in the high performance and ultra-high performance categories. To meet this purpose, Cooper Tire has outsourced the production of economy tires (medium truck and certain light vehicle tire products) to manufacturers in low-cost Asian countries such as China, India and Mexico.
Cooper Tire aims to offset raw material cost increases through improved product and price mix, better product management and manufacturing initiatives. Recent key initiatives by the company toward cost cutting include the closure of the underperforming Albany manufacturing facility along with the implementation of a headcount reduction program in its Europe-based facility. Moreover, Cooper has consistently worked toward raising the level of efficiency in each of its US based plants, thereby placing itself in a better competitive position.
REASONS TO SELL
Cooper Tire & Rubber operates in a very competitive industry with a 15% market share in light vehicle replacement tires in the U.S. Its peers include giants such as Bridgestone Corporation (Japan), Goodyear Tire & Rubber Company (U.S.) and Groupe Michelin (France). These competitors are substantially larger and serve OEMs as well as the replacement tire market. The company also faces competition from low-cost producers in Asia and South America. Some of those producers are foreign subsidiaries of Cooper’s competitors in North America.
The growth rate in the tire industry is expected to be slow and may decline slightly in the coming years. As a result, Copper will be required to increase its exports, particularly in the emerging markets.
Costs for certain raw materials used in the company’s operations remain volatile, including natural rubber, synthetic rubber, chemicals, carbon black and steel reinforcements. According to the company, further material price increases are to follow in 2011 as well. Cooper raised the prices of its products, including light vehicle tires, in response to the soaring material costs; yet it could not fully offset the escalation in raw material prices. The company’s North American Tire Operations segment implemented a price increase of 2.5% on February 1, 2011 for light vehicle tires in the U.S., another price increase between 8% and 9% on March 15, 2011 and yet another 5% escalation on December 01, 2011.
RECENT NEWS
Cooper Tire’s Profit Drops – October 31, 2011
Cooper Tiredelivered a net income of $0.27 per share from continuing operations in the third quarter of 2011, down significantly from $0.71 per share in the year-ago quarter. Reported income per share was also substantially lower than the Zacks Consensus Estimate of $0.33.
The poor performance of the company was largely due to higher raw material costs and lower profit from the North American Tire Operations.
Total sales in the quarter grew 19.4% year over year to $1.05 billion, beating the Zacks Consensus Estimate of $1.01 billion. However, gross profit decreased 27.5% to $93.0 million due to a 27.3% increase in cost of production to $960.5 million. Operating profit also declined 29.9% to $47 million, despite increased efficiencies and a decrease in selling, general and administrative (SG&A) expenses (down 18.8% to $45.8 million).
Segment Performance
The North American Tire Operations generated sales of $765 million, up 18.1% year over year due to favorable pricing and product mix and increased shipments. Unit sales for the North American segment grew 1.3% year over year.
The light vehicle tire shipments for the segment improved 1.1% in the U.S., compared with a 2.1% decrease in total industry shipment. Light truck tire shipments increased 11.9% in the U.S. while shipment of passenger tires dipped 1.0%.
Weak industry conditions coupled with higher raw material costs and reduced tire purchases by consumers negatively impacted the segment. Operating profit dropped to $17 million from $55 million in the comparable quarter of 2010.
International Tire Operations reported sales of $422 million in the quarter, up 29.8% year over year due to a better price-product mix and higher volumes. Sales volumes in Asia went up 2.2% (including inter-company shipments), while the same in the European operations climbed 12.4% from the year-ago level.
The segment was affected by weak demand in the domestic Chinese truck and bus tire market and the company’s strategy to focus more on profit rather than volume in certain export markets. Operating profit climbed to $30 million from $21 million in the prior-year quarter.
Financial Position
Cooper Tire’s cash and cash equivalents plunged to $90.6 million as of September 30, 2011 from $347.4 million as of September 30, 2010. Long-term debt rose to $329.6 million at the end of the third quarter of 2011 from $325.7 million at the end of the year-ago quarter.
In the first nine months of the year, the company had cash outflows of $72.7 million from operating activities compared with inflows of $67.3 million in the year-ago period, primarily due to lower earnings and more inventory additions. Meanwhile, capital expenditures increased to $121.3 million in the first three quarters from $75.0 million in the year-ago period.
Outlook
Cooper Tire believes that industry demand for tires will remain variable in the near term. However, the company expects sufficient improvements in the developing markets, but remains apprehensive about the mature markets including the U.S. The company also anticipates volatility in raw material prices.
Capital investments are expected to be between $140 million and $160 million, whereas, the effective tax rate is projected in the 20% to 30% range for 2011. The company also expects to release a majority of the valuation allowance in the fourth quarter of 2011.
VALUATION
Shares of Cooper Tire & Rubber Company are currently trading at 12.3x our 2011 EPS estimate of $1.10. The company’s current trailing 12-month earnings multiple is 9.9, compared with the 9.2 average for the peer group and 16.9 for the S&P 500. Over the last five years, shares of Cooper Tire & Rubber Company have traded in a range of 6.6x to 65.1x trailing 12-month earnings. The stock is also trading at a premium to the peer group, based on forward earnings estimates. The current P/E, which is close to the lower end of the historical range, is at a 52% premium to the peer group for 2011. Our long-term Neutral recommendation on the stock indicates that it will perform in line with the broader market. Our $14 target price, 12.7x our 2011 EPS estimate, reflects this view.
Key Indicators
Earnings Surprise and Estimate Revision History
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DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of CTB. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1040companies covered: Outperform- 16.3%, Neutral- 74.7%, Underperform – 7.0%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
Research Analyst / Debalika SarkarContent Ed. / Souvik Guha
Lead Analyst / Souvik Guha
QCA / Madhurima Das
Copy Ed. / Sreela Bose
/ Equity Research / CTB | Page 1