Shares of Cooper Tire & Rubber Company (CTB) have been surging lately. Despite rising commodity prices, the tire maker recently reported a solid third quarter marked by higher sales and better than expected profitability.
Analysts have been revising their estimates higher as they believe the company will be relatively successful in its attempt to thwart higher costs with price increases. The company also expects continued strength in emerging markets to drive earnings higher over the next several years.
Strong Sales Growth
Cooper Tire reported third quarter results on November 1. The company saw solid top-line growth of 10% year-over-year due to improved pricing and a favorable product mix, partially offset by lower volumes. Sales growth in North America was stellar, increasing 12.9%. The international division was up 9.6% over the same period.
The recent spike in commodity prices has squeezed the margins of many manufacturers, and Cooper is no expection. The company cited higher raw material prices as the reason for its decline in the gross margin from 17.5% to 14.5%.
The surge in natural rubber prices has obviously had a negative impact on Cooper. Additionally, approximately 65% of the company’s raw materials are petroleum-based, so higher crude oil prices has also hurt the company’s profitability.
Despite the higher input costs, earnings per share came in at $0.77, beating the Zacks Consensus Estimate by 24%. Apparently analysts were expecting a bigger squeeze on the company’s margins. EPS did decline 9% over the same quarter in 2009, however.
Positive Outlook
The company mentioned in its press release that it expects raw materials costs to continue to rise in the near term and have implemented price increases around the globe, including a 6.5% price hike in North America.
In spite of rising costs, management is fairly upbeat regarding its outlook for the company.
Business is booming in emerging markets, and especially in China, as approximately 33% of sales come from outside of North America. Management believes this will allow Cooper to continue to grow at or above industry averages for several years.
Analysts almost unanimously raised their estimates for the remainder of 2010 following third quarter results. The Zacks Consensus Estimate is $2.37, representing 21% annual EPS growth. The 2011 estimate is a penny higher at $2.38.
Dividend
Cooper has paid a quarterly dividend of $0.105 per share since 1998. It has a dividend yield of 2.1%.
Valuation looks somewhat attractive for Cooper. It trades at just 8.8x forward earnings, a discount to the industry average of 17.0x. Its PEG ratio is a reasonable 1.2.
The stock also trades at 2.4x book value, in-line with its peers. Return on equity is an impressive 27.7%, well-above the industry average of 11.3%.
Cooper Tire is based in Findlay, Ohio and has a market cap of $1.3 billion. It is a Zacks #2 Rank (Buy) stock.
Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.
