Big Upside in Store for This Tire Manufacturer

By Piyush Arora - October 30, 2012 | Tickers: BRDCY, CTB, GT | 0 Comments

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The unemployment rate in the US recently slid to 7.8%, which is the lowest level in the last 4 years.  Whenever people have disposable income in a low interest rate environment, they are more likely to spend it. Consumer spending is also witnessing an upside, which analysts believe is lifting the US economy. The Federal Reserve’s plan to revive the economy by monthly injections of $40 billion seems to be working.

According to the recent economic data, auto sales in the US in the month of September saw an upside of 12% from last year’s period. Auto sales in August also witnessed robust growth of 13%. According to analysts, auto sales in the month of October would be around 1.1 million units, which is up 12%, compared to the same period last year. This translates into a continued revenue bonanza, not only for auto manufacturers, but also for tire manufacturers like Cooper Tire and Rubber (NYSE: CTB).

Cooper Tire and Rubber was incorporated in 1930, and is currently the fourth largest tire manufacturer in the US, and ranks ninth in the world. The company is involved in the manufacturing and marketing of replacement tires for passenger cars and trucks via its North American Tire Operations and International tire operations. The company is geographically well diversified with shipping operations in 155 countries around the globe.

In the recent financial results, the company reported a staggering 349.56% increase in quarterly net income. The quarterly EPS came in $0.82 which beat the street’s estimates by more than 50% and revenues rose by a healthy 15% compared to last year’s quarter. The operating profit surged by 33.8%, and the company ended the quarter with $241 million in cash and cash equivalents, up 74.6% from the year ago quarter.

The strong financial performance of the company is expected to continue as rubber prices are gradually falling. Thanks to the oversupply of the commodity in the market, rubber prices have declined by more than 51% from the highs it created last year. Analysts expect rubber pricing to remain weak as rubber production is still way ahead of its demand.

According to Reuters, Apollo Tyres is in talks with Cooper Tires to acquire a majority stake in the latter company. The deal is said to be worth $600-$800 million, and Apollo Tyres would be raising the required capital via debt and its share issuance of up to $150 million in India. According to Forbes, Cooper Tire is valued at $800 million, a 44% premium to its current market price, and investors could be looking at a huge upside in the stock’s price. Some reports claim that the since more than 90% of shares of Cooper Tire are float, the acquisition could become even more hostile, which would be even better for investors.

The company shares its market space with Bridgestone (NASDAQOTH: BRDCY) and Goodyear Tire and Rubber (NASDAQ: GT).

The financial metrics indicate that Cooper Tire is the most undervalued stock amongst its peers, and also has the lowest P/S ratio. The trailing PEG ratio of CTB stands at 0.52x and to top it all, the stock yields a decent 2.24%.

To wrap it up, the low prices of rubber are only going to add to the margins of rubber companies. The financial performance of the company in the previous quarter was superb. Analysts expect that huge upside is in store for Cooper Tire, and it is due to all the mentioned reasons, CTB has a strong buy rating.

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