We reiterate our Neutral recommendation on Cooper Tire & Rubber Co. (CTB), which is one of the well-established manufacturers and marketers of tires and related products. Headquartered in Findlay, Ohio, Cooper Tire has more than 60 manufacturing, sales, distribution, technical and design facilities located in 10 countries across the world.
During the last quarter, Cooper Tire realized adjusted net income of $17 million or 27 cents per share, down significantly from last year’s $42 million or 67 cents per share. However, net income was higher than the Zacks Consensus Estimate of 23 cents per share. The first quarter results were largely affected by higher raw material costs, partly offset by favorable price and mix.
Sales in the quarter grew 20% to $906 million. Operating profit fell to $32 million, driven by higher SG&A charges. SG&A expenses rose 19% to $53 million.
Following the earnings release, only one out of the 5 analysts made an upward revision to its estimates for the upcoming quarter. The second quarter earnings estimate is 52 cents for Cooper Tire, reflecting an annualized growth of 27.3% and an upside potential of 5.77%.
The most significant concern for Cooper Tire is the rising costs of raw materials, including natural rubber, synthetic rubber, chemicals, carbon black and steel reinforcements. As a consequence, , the company’s North American Tire Operations segment implemented a price increase of 2.5% February 1 on light vehicle tires in the U.S. and another price increase between 8% and 9% on March 15. The company expects a further increase in prices in response to the soaring prices of materials.
In order to keep costs at low level in face of the growing material costs, Cooper Tire also aims at increasing cost efficiency through improved product and price mix, better product management and manufacturing initiatives. Recent key initiatives by the company toward cost cutting include the closure of the underperforming Albany manufacturing facility along with the implementation of a headcount reduction program in its Europe-based facility.
The company is also expected to have strong performance potential going forward. Cooper continues to outperform the total industry shipments in the U.S. Owing to an upward pricing pressure, total light vehicle tire shipments of Cooper’s North American segment increased 9.2% in the U.S. versus the total industry shipment increase of 8.8% (as reported by the Rubber Manufacturers Association).
However, high dependency on imports may be problematic for the future growth of the company’s local facilities. Major risks include shrinking of the American markets along with threats from fluctuating exchange rates.
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