Chinese Tyre Tariff Leaves Cooper Better Off

While opinions are divided about the perceived fairness of the US government’s 35 per cent Chinese tyre import levy, the repercussions on the global market are undeniable. After the initial fluctuations in tyre manufacturers share prices (down for those producing mainly in the Far East; up for the North American tyre makers), the latest effect has been for banks to raise their earnings estimates for Cooper Tire & Rubber. The decision comes on the back of an investor’s note which suggests Cooper Tire, which has opposed the tax, appears to benefit from the system overall.

Writing today (21 September) Deutsche Bank analysts said the US tariffs “have the potential to provide a significant net benefit to Cooper’s profitability over the intermediate term.” As a result the company raised its earnings estimates for the company to $1.61, $2.25 and $2.50 for 2009, 2010, and 2011, respectively, from $1.50, $1.40 and $1.48.

The analysts also gave some insight into Cooper’s post-tariff North American pricing policy. Cooper has reportedly announced price increases ranging from 1.5 per cent to 12 per cent for its US tyre business. In total this is expected to equate to 5 per cent price rise as a result of the action. “Every 1 per cent of additional North American pricing adds approximately $19 million to EBIT, and $0.27 to Cooper’s earnings per share (a 5 per cent increase should equate to approximately $3 per tyre; multiplied by 33 million tyres this should translate to $95 million EBIT),” the analysts explained adding that their figures also incorporate a negative impact for Cooper’s China operations.

On this note, Cooper is now expected to import between 3 and 3.5 million units from its Cooper-Kenda joint venture in 2010, with the company likely to attempt to divert the remaining 1 million tyres to other international markets such as Europe.

Due to its significant product interests in China Cooper feels both the benefit and the disadvantage of the tariff, however, the company appears to end around $30 million better off. Applying a 35 per cent tariff to 3.5 million tyres at $50 each equates to a $64 million headwind (assuming that the burden of the 35 per cent import tariff is absorbed by the importing company, which is Cooper’s NA business, and is not shared with its joint venture partner).

As a result, Deutsche Bank raised is share price target to $20.50 from $16.80.