Cooper Tire to Buy Serbian Plant

Zacks

Cooper Tire & Rubber Company (NYSE:CTB - News) recently entered into an agreement to acquire the assets of an existing tire plant in Kruševac, Serbia. The acquisition involves an initial investment of about $17.3 million.

Following the acquisition, the plant will be renamed as Cooper Tire Serbia and will complement the production at the company's existing facility in Melksham, England, which manufactures high performance tires. The new plant is expected to strengthen Cooper’s business in the international market, especially in Europe and Russia. The to-be-acquired plant is strategically located to facilitate transportation of tires in these regions in a cost-effective manner.

As a result, the company plans to invest an additional $67 million in the Serbia plant over the next three years. Moreover, the company also expects the Serbian government to contribute approximately $13.4 million to the project, thus enhancing execution at the new plant.

However, last month, Cooper Tire sold its 43-year-old tire manufacturing plant in Union City, Tennessee to Titan Tire Corporation for an undisclosed price. This reflects the company’s strategy of divesting inefficient plants and acquiring new plants in different locations to further increase efficiency and improve financials.

The company released its third quarter earnings on October 31, 2011. Cooper Tire delivered net income from continuing operations of 27 cents per share in the third quarter of 2011, down significantly from 71 cents per share in the year-ago quarter.

The poor performance of the company was attributable 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 while 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 lower selling, general and administrative (SG&A) expenses (down 18.8% to $45.8 million).

The soaring prices of natural rubber, synthetic rubber, chemicals, carbon black and steel reinforcements have exerted excessive pressure on the company’s bottom line. The company has implemented three price increases in 2011, but has failed to fully offset the headwind.

However, Cooper Tire’s efforts to counter rising raw material costs through improved product and price mix, better product management and manufacturing initiatives are mention worthy.

Considering all these, the shares of Cooper Tire are maintaining a Zacks #3 Rank reflecting a short-term Hold rating.

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