Cooper Tire Rubber Co.
/ (CTB-NYSE)/ Equity Research / CTB | Page 1
Current Recommendation / OUTPERFORM
Prior Recommendation / Neutral
Date of Last Change / 08/19/2014
Current Price (08/18/14) / $29.66
Target Price / $36.00
SUMMARY
We are raising Cooper Tire to Outperform, based on its high-performance products and improving business operations since the termination of the Apollo Tyres merger agreement. The accelerated share repurchase program is also expected to have a positive impact on future earnings per share. The company reported earnings per share of $0.59 in the second quarter of 2014,which lagged the Zacks Consensus Estimate of $0.80. However, earnings improved from $0.55 in the prior-year quarter. Revenuesrose 1% year over year to $889 million, beating the Zacks Consensus Estimate of $870 million as well./ Equity Research / CTB | Page 1
SUMMARY DATA
52-Week High / $33.2252-Week Low / $21.62
One-Year Return (%) / -6.61
Beta / 1.74
Average Daily Volume (sh) / 775,606
Shares Outstanding (mil) / 64
Market Capitalization ($mil) / $1,898
Short Interest Ratio (days) / 7.91
Institutional Ownership (%) / 91
Insider Ownership (%) / 3
Annual Cash Dividend / $0.42
Dividend Yield (%) / 1.42
5-Yr. Historical Growth Rates
Sales (%) / 5.7
Earnings Per Share (%) / 10.3
Dividend (%) / 0.0
P/E using TTM EPS / 18.4
P/E using 2014 Estimate / 11.1
P/E using 2015 Estimate / 10.1
Zacks Rank *: Short Term
1 – 3 months outlook / 2 - Buy
* 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, OH, manufactures and markets tires and related products. The company has more than 72 manufacturing, sales, distribution, technical and design facilities located in 11 countries across the world. Cooper Tire is the eleventh largest tire company globally and the fourth largest tire manufacturer in North America.
Cooper Tire's operations are organized into two geographical business segments: North American Tire Operations (accounting for about 69.4% of revenues from external customers in first-half 2014) and International Tire Operations (30.6%).
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 does not sell directly to original equipment manufacturers (OEMs).
Through the International Tire Operations segment, Cooper Tire produces passenger car, light truck, motorcycle and racing tires in the U.K., Serbia and China. In the U.K., the segment manufactures these products 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 radial and bias medium truck tiresand passenger and light truck tires through its joint ventures (JV) with Kenda Rubber Industrial Co. of Taiwan (Kunshan plant) and a Chinese company, Chengshan (Shandong) Tire Co. Together with itsJV 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 develops high-performance products to cater to the current market demand. The company expects the improving product mix to expand profitability.In Apr 2014, the company launched the CS5 Touring, which is itsbest passenger touring tire so far.It enables consumers to ascertain the remaining tread life of the tire through theWear Square visual wear indicator. Some otherproducts launched last year include WM-SA2, Weather-Master Snow, and Discoverer M+S Sport, which are useful in winter.The company also launched the new Mastercraft premium off-road tire. The new Discoverer HT3 tire family is also available at dealers across the country. Discoverer HT3 tire is equipped with modern technology, which helps in improving the performance of trucks on highways. It can be used in light trucks and small fleet delivery vehicles for highway or commercial driving.Cooper Tire plans to launch a record number of tires this year.
The company aims to attain operating profit over 10% and net sales of $5–$6 billion per annum in the long term.The company plans to reduce its manufacturing costs by 14% by 2017 through increased automation in production facilities and consolidation of product family. Cooper Tire also plans to maintain a sustained annual operating profit of 8–10%. It plans to reduce the number of global product families by 60% by 2020. This will lead to simplification of the manufacturing process, lower costs, higher sourcing flexibility and faster product development. In the North American Segment, Cooper Tire aims to improve margin and mix on the back of sales growth, product launches, capacity conversion to focus on premium products and expansion in markets with relatively low penetration. In the International Segment, Cooper Tire aims to enhance sales, so that it can generate half of the company’s global revenues.
On Aug 7, 2014, Cooper Tire announced an accelerated share repurchase (ASR) program worth $200 million with J.P. Morgan Chase Bank. The program will extend from Aug 7, 2014 to Feb 2015. The ASR will significantly reduce the outstanding shares of the company, thus having a positive impact on future earnings per share.
Cooper Tire is expected to benefit from its business model and execution of its strategic plan. The company’s partnership with Michigan-based automotive startup Elio Motors, Inc. will have favorable impacts in the long run. According to the deal, Cooper Tire will supply tires equipped with its low rolling resistance technology for Elio Motors’ ultra-high mileage Elio car. Elio Motors is targeting a mileage of 84 miles per gallon, which will put the car in the ultra-high mileage category. Cooper Tire’s low rolling resistance technology will help the company achieve this mileage.
After the dismissal of the merger proposal with Apollo Tyres Ltd., Cooper Tire is focusing on improving its business operation. As a result, its earnings have begun to improve. The company is well positioned due to its good quality brands, loyal customer base, efficient workforce, strong technical capabilities and network of manufacturing facilities. Cooper Tire has also restored normal operations at its Chinese JV.
RISKS
Cooper Tire operates in a very competitive industry. Its peers are bigger companies with greater financial resources who serve OEMs as well as the replacement tire market. Moreover, the competitors have operations in lower-cost countries. If the company cannot improve its operating efficiencies and counter competition from these peers, its results will suffer. The company also faces competition from low-cost producers in Asia and South America.
The future ownership of Cooper Tire’s Chinese JV, Cooper Chengshan (Shandong) Tire Company Ltd. (CCT) is yet to be decided. This is important as the company’s financial plans and targets will be affected by the ownership of CCT. Loss of the Chinese joint venture could hamper Cooper Tire’s International Tire Operations segment, which is already witnessing declining profits due to lower pricing.
Cooper Tire’s operating profits are negatively impacted by pressure from cheaper Chinese imports and some problems related to the unsuccessful implementation of Enterprise Resource Planning (ERP). Moreover, we are concerned about the weak global economic conditions, which will weigh on the company’s results.
RECENT NEWS
Cooper Tire Earnings Miss Estimates in Q2, Improve Y/Y – Aug 7, 2014
Cooper Tire’searnings in the second quarter of 2014 increased to $0.59 from $0.55 per share in the prior-year quarter. However, the figure lagged the Zacks Consensus Estimate of $0.80. Net income amounted to $38 million as against $35 million in the second quarter of 2013.
Revenues of Cooper Tire improved 1% year over year to $889 million in the quarter, beating the Zacks Consensus Estimate of $870 million.
Operating profit increased to $77 million (8.6% of sales) from $69 million (7.8% of sales) a year ago.
Segment Details
The North American Tire Operations recorded a 3% increase in revenues to $639 million. Operating profit in the segment improved to $65 million (10.1% of sales) from $59 million (9.5% of sales) in the second quarter of 2013, driven by favorable raw material costs, higher unit volumes and manufacturing cost efficiencies, which offset the unfavorable price and mix.
The International Tire Operations posted an 8% fall in revenues to $327 million. Operating profit dropped to $26 million (8.1% of sales) from $29 million (8.3% of sales) a year ago due to lower price and mix.
Financial Position
Cooper Tire had cash and cash equivalents of $327 million as of Jun 30, 2014, up from $244 million in the corresponding year-ago quarter end. Long-term debt was $341.9 million as of Jun 30, 2014, translating into a long-term debt-to-capitalization ratio of 24.6% against $348.1 million of debt and long-term debt-to-capitalization ratio of 28.8% as of Jun 30, 2013.
Dividend Update
On Aug 6, 2014, Cooper Tire announced a quarterly dividend of $0.105 per share, payable on Sep 26, 2014 to stockholders of record as of Sep 2, 2014.
Outlook
Cooper Tire expects raw material costs to remain flat sequentially in the third quarter of 2014. In the long run, raw material costs are expected to increase. For 2014, capital expenditures are expected between $175 million and $185 million.
VALUATION
Shares of Cooper Tire are currently trading at 11.1x our 2014 EPS estimate of $2.67. The company’s current trailing 12-month earnings multiple is 18.4x, compared with the 12.6x average for the peer group and 18.0x for the S&P 500. Over the last five years, shares of Cooper Tire have traded in a range of 6.2x to 26.7x trailing 12-month earnings. The stock is trading at a 3.7% premium to the peer group, based on the forward earnings estimate for 2014. Our long-term Outperform recommendation on the stock indicates that it will perform better than the broader market. Our target priceof $36.00, which is 13.5x our 2014 EPS estimate, reflects this view.
Key Indicators
Earnings Surprise and Estimate Revision History
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 1036companies covered: Outperform- 15.9%, Neutral- 77.7%, Underperform – 5.4%. 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.
/ Equity Research / CTB | Page 1