We recently upgraded our recommendation on Cooper Tire & Rubber Company (CTB) to Neutral from Underperform. Headquartered in Findlay, Ohio, Cooper Tire manufactures and markets tires and related products. Cooper is the ninth largest tire manufacturing company in the world and is also one of the 350 large companies in America.
The company released its third quarter earnings on October 31, 2011. Cooper Tire delivered net income from continuing operations of 27 cents per share in the third quarter of 2011, down significantly from 71 cents per share in the year-ago quarter.
The poor performance of the company was attributable to higher raw material costs and lower profit from the North American Tire Operations.
Total sales in the quarter grew 19.4% year over year to $1.05 billion while gross profit decreased 27.5% to $93.0 million due to a 27.3% increase in cost of production to $960.5 million.
Operating profit also declined 29.9% to $47 million, despite increased efficiencies and lower selling, general and administrative (SG&A) expenses (down 18.8% to $45.8 million).
The soaring prices of natural rubber, synthetic rubber, chemicals, carbon black and steel reinforcements have exerted excessive pressure on the company’s bottom line. The company has implemented three price increases in 2011, but failed to fully offset the headwind.
However, Cooper Tire’s efforts to counter rising raw material costs through improved product and price mix, better product management and manufacturing initiatives are worthy of mention.
The recent key initiatives on the company’s part are aimed at lowering costs, such as the closure of the underperforming Albany manufacturing facility along with the implementation of headcount reduction program at its Europe-based facility. Moreover, Cooper has consistently worked toward raising the level of efficiency across each of its US-based plants, thereby enhancing its competitive position.
In addition, Cooper Tire’s North American Tire Operations segment develops high-performance products to cater to the current market demand. The company is working toward increasing its capacity in order to meet the rising demand for replacement tires in the high performance and ultra-high performance categories.
Considering all these, the shares of Cooper Tire are maintaining a Zacks #3 Rank reflecting a short-term Hold rating.
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