Cooper Tire to Underperform - Analyst Blog

We downgrade our recommendation on Cooper Tire & Rubber Co. (CTB) to Underperform from Neutral. Based in Findlay, Ohio, Cooper Tire is the ninth largest tire company in the world and is also one of the 350 large companies in America. The company manufactures and markets tires and related products.

Superior Industries released its 2011 first quarter results on April 26, 2011. The company reported adjusted net income of $17 million or $0.27 per share, down 60% from last year’s $42 million or $0.67 per share. However, net sales grew 20% to $906 million.

Cooper Tire’s cash and cash equivalents decreased significantly. The company has a cash balance of $188 million as of March 31, 2011 compared with $413 million as of December 31, 2010.

Moreover, total debt increased to $334 million at the end of the second quarter from $327 million at the end of the fourth quarter. The deteriorated balance sheet can restrict the company’s business expansion strategies.

One of the significant near term threats to the company is the rising prices of raw materials, including natural rubber, synthetic rubber, chemicals, carbon black and steel reinforcements. Cooper raised the prices of its products, including light vehicle tires, in response to the soaring material costs; yet it could not fully offset the escalation in raw material prices.

In addition, Cooper’s high dependency on imports may be problematic for the future growth of its local facilities. Major risks include shrinking of the American markets along with threats from fluctuating exchange rates.

Although the company has attempted to reduce cost to improve margins and has tried to grow its business, especially the North American Tire Operation segment, these efforts are not expected to bring substantial benefits any time soon.

The efforts to reduce costs will be offset by rising material costs and the business expansion plans are feared to be hampered by the increasing competitive pressure in the industry. Its key competitors include Japan-based Bridgestone Corp. (BRDCY), U.S.-based Goodyear Tire & Rubber Co. (GT) and France-based Groupe Michelin.

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