On Jul 4, we maintained our Neutral recommendation on Cooper Tire & Rubber Company (CTB). We are pleased with its improved 2013-first quarter results and focus on reducing costs together with increased efficiency in each of the plants. However, we are concerned about the increasingly competitive landscape.
Why the Reiteration?
On May 9, Cooper Tire reported earnings of 87 cents per share in the first quarter of 2013 that more than doubled from 34 cents in the prior-year quarter. With this, the company topped the Zacks Consensus Estimate by a substantial margin of 21 cents per share.
However, revenues went down 12.5% to $861.7 million during the quarter, missing the Zacks Consensus Estimate of $971.0 million. The quarter recorded decline in volumes due to deployment of a major phase of ERP system and inventory adjustments by certain key customers. In addition, the soft global tire market and continuous weakness in the world economy marred consumer spending.
Following the release of the first quarter results, the Zacks Consensus Estimate for 2013 increased 0.3% to $3.48 per share. The Zacks Consensus Estimate for 2014 also went up 0.6% to $3.60 per share. Currently, Cooper Tire carries a Zacks Rank #3 (Hold).
Cooper Tire will benefit from its focus on developing and improving high-performance products, which will meet the rising market demand. It is also working constantly to increase its capacity and has outsourced the production of tires to manufacturers in low-cost countries such as China, India and Mexico.
In addition, Cooper Tire’s initiative to improve product and price mix will offset the rise in raw material costs. The company also focuses on increasing the efficiency of the U.S. based plants in order to capture a better competitive position.
However, we are concerned about the increasingly competitive industry. Cooper Tire competes with Bridgestone Corporation in Japan, Goodyear Tire & Rubber Company (GT) in the U.S. and Groupe Michelin in France. The peers occupy a significant market position, where Cooper Tire occupies only 15% market share in light vehicle replacement tires in the U.S.
Other Stocks to Consider
Some stocks that are performing well in the broader industry where Cooper Tire operates include Visteon Corp. (VC) and Magna International Inc. (MGA). Both carry a Zacks Rank #1 (Strong Buy).
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