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Cooper-Standard Tumbles 43% YTD: Will the Bad Spell Stay?

Zacks Equity Research

Cooper-Standard CPS is in hot waters, which has resulted in an unimpressive run on the bourses. Shares of this Michigan-based auto parts maker have plunged almost 43% on a year-to-date basis against the industry’s 16.6% rally. Challenging market conditions, resulting in weak vehicle production volumes, have been weighing on the firm. Notably, the company missed earnings estimates in each of the trailing four quarters. Let’s take a closer look at the factors that are acting as barriers in Cooper-Standard’s path.

Factors Plaguing Cooper-Standard’s Performance

Concerns related to economic slowdown have been dampening demand for vehicles, thereby affecting Cooper-Standard’s performance. Weak vehicle production, and unfavorable volume and customer mix have adversely impacted the company’s top line. Notably, in the last reported quarter, the firm’s sales and profits declined across major markets including North America, Asia Pacific and Europe. Unfavorable foreign exchange and the sale of the company’s AVS business early this year also affected Cooper-Standard’s results.

Market weakness, especially in Europe and Asia Pacific regions, hit the company hard. In fact, the firm anticipates light vehicle production to remain at or below current levels through 2021 in Asian and European markets.

Worryingly, U.S.-Sino trade tensions have been weighing on the stock. Near-term industry headwinds will continue to put pressure on its results in the second half of 2019. Trade disputes and increased tariff have resulted in high commodity costs for Cooper Standard. The commodity cost inflation on certain raw materials such as steel and aluminum have pressurized the company’s margins. Assuming that the current tariffs will remain unchanged for the rest of 2019, the company predicted that raw material costs might hurt margins by 1.8%. Further, other inflations that include wages, energy, rent and utility are expected to hamper margin by 1.5% in the current year.

The company’s bleak outlook dampens investors’ confidence. For 2019, it anticipates sales in the range of $3-$3.2 billion, down from the previous view of $3.2-$3.4 billion. It expects adjusted EBITDA in the band of $270-$300 million, down from the earlier guidance of $300-$340 million.

All in all, lower industry volumes,adverse customer mix and higher commodity prices amid the trade tiff have been weighing on the stock of late.

Can the Stock Rebound?

Cooper-Standard continues at a record pace for new program launches and contract awards related to recent product innovations. These innovative plans are driving the company to expand opportunities and attract new customers. It aims at 272 new launches this year, which will help it gaina competitive advantage over others. Around 45 program launches in North America and benefits from new commercial agreements with key customers are likely to drive Cooper Standard’s margins in the region.

The company has been making efforts to trim costs through operational efficiency. Moreover, improved operating efficiency is expected to not only reduce SG&A expenses but also aid cost saving and lean initiatives. Lean purchasing initiatives and restructuring savings are likely to result in $130 million total cost savings in 2019. These actions are focused on improving its cash flow and balance sheet. In the second half, the firm expects to generate positive free cash flow. For the full year, it aims at becoming cash flow neutral, implying a year-over-year improvement. Favorable cash position and credit profile will provide the company with sufficient liquidity that can support near-term operating requirements, along with long-term strategic plans.

While the Zacks Rank #3 (Hold) company is undertaking several initiatives, we are yet to see if these can completely offset the aforementioned hurdles. 

Meanwhile, some better-ranked players in the same industry include Garrett Motion Inc. GTX, Veoneer, Inc. VNE and China Automotive Systems, Inc. CAAS, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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