Cooper Tire Shares Fall, But Analysts Say Market Underestimates Firm’s Potential

Shares in Cooper Tire & Rubber Co. fell by as much as 13 per cent yesterday (Thursday 5 August) after the tyre manufacturer reported second-quarter revenue below estimates and said earnings were hurt by increased raw material costs. However, market analysts reported that the market has underestimated Cooper’s “near term potential.”

It seems that bearish investors did not interpret the facts that the results included restructuring charges of $7 million related to the closure of its Albany, Georgia facility; and that it raised prices by up to 7.5 per cent 1 June 2010 as positives. In both cases the moves are medium or long term decisions that will take time to be reflected in the balance sheet. In the case of the recent price rise, for example, the company expects to see the full effect of this in the third quarter of 2010.

According to Deutsche Bank (DB) analyst Rod Lache, the main problem appears to have been that Cooper Tire reported second quarter earnings per share of $0.40. Despite the fact that this was in line with DB’s estimations, this was below the consensus of $0.45, making the result appear worse than expected.

However, Lache reports that Cooper’s 5.1 per cent second quarter EBIT margin was “reasonably strong in the context of raw material headwinds.” Looking forward, the market analysts pointed to “several sequential positives.” These include stronger pricing and stronger mix, which could add 3 – 4 per cent to average transaction prices; sequentially flat raw material costs; improved volumes; better manufacturing costs.

“The bottom line is that we believe Cooper Tire’s margins could improve by 300-400 basis points sequentially…However, it’s worth noting that we have not reflected any prospective price increases in our model, which appears to be overly conservative. Given the raw material headwinds facing the industry in [the second half of 2010], we do expect another round of price increases throughout North America in the October timeframe. Incorporating additional price increases into our Cooper Tire model could potentially drive margins even higher, towards the 10 per cent range…”

Related News:

• Strong Sales Push Cooper to Strong First Half

• Cooper Pays Out Quarterly Dividend

• Cooper to Restate 2009, 1Q 2010 Financials