Cooper Tire & Rubber Company (CTB, Financial) is a leading manufacturer and marketer of replacement tires. It is the fourth largest tire manufacturer in North America and the twelfth largest tire company in the world based on sales. Cooper specializes in the design, manufacture, marketing and sales of passenger car and light truck tires. Cooper and its subsidiaries also sell medium truck, motorcycle and racing tires. The company is organized into two separate, reportable business segments: Americas Tire Operations and International Tire Operations. Each segment is managed separately. CTB currently operates 8 manufacturing facilities and 21 distribution centers in 11 countries. As of December 31, 2014, it employed 8,881 people worldwide.
Financial Overview: The following table show revenue and profitability of the company over the last three years (Source:10-K filling)
After a very challenging 2013, the company's performance improved significantly in 2014. The company's performance in the second half of 2013 were impacted by multiple manufacturing disruptions at its Chinese Joint Venture – CCT. Workers at CCT went on strike in 2014 because of concerns about the company's proposed merger with Apollo Tires.
In January 2014, the company came to an agreement with its Joint Venture partner and the workers union to resume normal production at CCT plant. Part of the agreement included a process of establishing a sole owner of the Joint Venture. In November 2014, the company's JV partner elected to buy the company's interest and the company received $262 million net of taxes and including dividend.
This divestiture removed a significant distraction for management and they are now focused on adding capacity to the company's wholly owned facility in China – CKT plant. The company also have off-take rights with CCT for supply through mid-2018. This off-take agreement provides the company with a secure source of supply, and prevents any short term distraction, while management invests in its long term growth strategy.
In addition to Chinese situation improving, the company also posted strong performance in its North American business. Last quarter, the company posted 8% volume growth and an operating margin of ~10%. One of the key drivers for this performance was the new products launch. In 2014, the number of new products launched 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 12.86 times FY2016 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.
