Apollo Tyres Bought Cooper: Will the Tire Industry Grow Again?

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The very recent acquisition of Cooper Tire & Rubber (NYSE: CTB) by Apollo Tyres of India is proof that that the tire sector is gaining dynamism after being hit by the long recession in the automobile industry.

With the exception of Europe, increasing auto sales around the world are starting to drive profits for tire companies again. However, not every company will profit as much as its peers from this incipient bonanza.  

The acquisition and the new company’s outlook

Until the acquisition in June 12th, Cooper Tire & Rubber (NYSE: CTB) was the 11th-largest tire company by revenue. India's Apollo Tyres paid $2.5 billion in an all-cash transaction, $35 per share. This merger agreement will combine two companies with highly complementary brands, technological know-how, and international presence to create a global leader in tire production and commerce.

Cooper and Apollo Tyres own a well-know brand portfolio that includes premium and mid-tier brands. Plus, the two organizations have almost no geographic overlap, which will help world coverage.

With a combined $6.6 billion in total sales, the new company will be the 7th largest tire company in the world and it is expected to generate annual value creation benefits of $80-$120.million in EBITDA.

Before the acquisition, pressure on margins was forcing Cooper to make strong efforts to reduce costs and increase efficiency. Apollo Tyres was experiencing sales declines in its home country, India, which accounts for 60% of the company’s revenue.

Hopefully, the new company will integrate successfully and minimize its inefficiencies.

How are other American tire companies performing?

The U.S. auto and truck industry is showing signs of recovery. This year, higher light truck sales are expected due to the revival in the housing market. This year, 15 million trucks will be sold, feeding double-digit sales growth for the big three Detroit automakers.

Titan International (NYSE: TWI) has a strong focus on sales to the agribusiness industry, responsible for 59% of net sales in 2012. Second in importance is the construction segment with 28%, which as we mentioned, is strengthening. The company’s position as an off-highway wheel provider has helped its business.

Sales improved 25% in the first quarter year-over-year, reaching $578.4 million. Gross profit grew to $96.8, a 20% of net sales. However, Titan’s exposure to the agricultural equipment market could put a cap on future profits. This sector might suffer cuts in new equipment expenditures forced by climate change and poor harvests. The drought in the U.S. is over, but floods in Eastern Europe remain a concern.

Goodyear Tire & Rubber (NASDAQ: GT) owns more than 53 manufacturing facilities that make and distribute tires for a range of applications. The company has a vast geographical diversification serving Original Equipment Makers (OEMs) and the replacement market, which provides a steady cash flow. Goodyear’s focus on the emerging markets is encouraging. The company will increase 50% its worldwide capacity by augmenting low-cost production capacities. I support this decision as it will help the companies finances and remain competitive against cheap competition.

However, due to low industry demand, the company is experiencing pricing pressure from OEMs, responsible for 30% of sales. Weaknesses and related production cuts in Europe might push substantial unit volume decreases, which the company is suffering from already.

Conclusion

Apollo Tyres along with Cooper will have to demonstrate a solid integration. I believe the new company will succeed and drive positive profits in the next quarters, but it would be prudent to wait a bit and see some positive results in terms of sales and geographic expansion. The impact of the recovery is key.

Titan is in good track. If it manages to maintain its market share or even increase it I would definitely buy this stock.

Although Goodyear is in a great position realize the market’s better outlook, it has not yet shown better results. Until then, I would wait and monitor it.


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