Joel Greenblatt (Trades, Portfolio) is founder and managing partner of Gotham Asset Management, LLC. He is known for the invention of Magic Formula Investing. He is the author of two investment books, including Joel Greenblatt (Trades, Portfolio): "The Little Book that Beats the Market." He is also an adjunct professor at the Columbia Business School.
Greenblatt tries to find cheap and good companies. He looks for value with a catalyst. Greenblatt likes special situations and thinks that they are simply different places to find cheap stocks. In his own hedge fund, Greenblatt uses the basic principals in the Magic Formula: Look for high ROC and high earnings yield. He tries to figure out what "normalized earnings" will be 3-4 years into the future. Greenblatt makes sure the stock is very cheap based on normalized earnings.
Last quarter, he increased his holdings in Cooper Tire (CTB, Financial) by buying 1,082,815 shares. As of June 30, he held 1,316,138 shares of the company. The following chart shows his holding history in the company.
Cooper Tire is a leading manufacturer and marketer of replacement tires. 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 second quarter sales rose 5% as a result of increases in the Americas segment. The Americas had a very strong performance with volume increasing 7.3% and a record operating profit of $109 million. The Americas segment posted operating margins of 16.1%. The higher Americas volume along with lower raw material cost and several successful product launches drove total company operating profit to $99 million or 13.2% of sales. The company posted earnings per share of $1.03 compared with $0.59 per share, in the second quarter of last year.
One of the key drivers for this performance was the new products launch. Earlier this year, 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 U.S., the company introduced the CS5 touring tire, 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 includes 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 demonstrates Cooper’s commitment to the development of new products that deliver improved performance.
In addition to good topline prospects, Cooper's bottom line 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 earlier this year that will benefit its margins in the near term.
Cooper Tire & Rubber is trading at 12.10 times FY2015 EPS and has a dividend yield of 1.10%. According to sell side estimates, the company’s EPS is expected to grow 23% in the current fiscal year and 5.75% in the next fiscal year. The company’s stock offers margin of safety of 30% according to the GuruFocus DCF calculator. Given the company’s good growth prospects and reasonable valuations, the stock is a buy.
