Cooper Tire & Rubber Company’s (CTB) stock price has corrected over 12% since the beginning of this month. Cooper Tire is a leading manufacturer and marketer of replacement tires. According to the GuruFocus DCF calculator, the company's stock is undervalued and offers 28% margin of safety at current levels.
Last quarter, the company posted good results. While total sales were less than the prior year because of the absence of CCT (the company’s former joint venture in China that was divested in November 2014), excluding CCT the company’s first quarter sales rose 4% as a result of increases in the Americas segment. The Americas had a very strong performance with volume increasing 5% and a record first quarter operating profit of $90 million. The Americas segment posted operating margins of 15%. The higher Americas volume along with lower raw material cost and several successful product launches drove total company operating profit to $70 million or 10.6% of sales. The company posted earnings per share of $0.69 just slightly below last year despite the absence of CCT for the full quarter.
One of the key drivers for this performance was the new products launch. In the first quarter, the company introduced a new Roadmaster tires specifically designed to withstand the demands of drop-decked trailers. The company also recently extended its adventure touring motor cycle tire line in the U.K. with the launch of new adventurous sport tire the A1 Trail Rider. In 2014, the number of new products was among the highest in Cooper's history. In the US, the company introduced the CS5 touring tires which has been well received by the industry. In fact, this tire recently earned one of the world's most prestigious design awards, a 2014 Good Design award from the Chicago Athenaeum. The company also reintroduced the Roadmaster brand in the second quarter of 2014 and has regained a position with almost all of its top 30 customers. Other product introduction include the Discoverer SRX, a luxury sport utility tire as well as the Discoverer XT4 tire which is developed specifically for the Canadian markets.
Going forward, innovation and strengthening its technology remains a key focus area for the company. Cooper is taking various steps in this regard. In 2014, it relocated its Asia tech center to a new larger facility in Kunshan, China and the company is also set to unveil the new Global Technical Center in Ohio. This new center demonstrate Coopers commitment to the development of new products that deliver improved performance.
In addition to good topline prospects, Cooper's bottomline is also expected to benefit from lower raw material prices in 2015. Last quarter, the company's operating profit was impacted favorably to the tune of $35 million from lower raw material costs. For 2015, lower raw materials costs are likely to be a tailwind for the company. In addition, Cooper and other tire manufacturers have announced prices while in January 2015 which will benefit its margins in the near term.
Cooper Tire & Rubber is trading at 13.21 times FY2015 EPS and has a dividend yield of 1.10%. According to sell side estimates, the company’s EPS is expected to grow 17% in the current fiscal year and 13% in the next fiscal year. Out of seven analysts covering the company, two are positive and have buy recommendations, and five have hold ratings. Given the company’s good growth prospects and reasonable valuations, I recommended buying the stock.
