Continental AG reportedly is mulling over an acquisition in the tire industry. Is Cooper Tire & Rubber Co. a likely target?

Nick Mitchell, senior vice president of research for Northcoast Research Holdings LLC, believes so.

“The recent Reuters story suggesting that Continental AG is exploring the possibilities of turning to the acquisition market to fuel its growth plans, with an eye on the replacement tire market, has spurred questions as to the entities the company would be most interested in acquiring,” he says in his latest report on Cooper.

“While the theoretical list of potential ‘acquirees’ is long given the seemingly endless number of manufacturers around the globe, we believe that Kumho Tire and Cooper Tire & Rubber are the most likely targets.”

Mitchell says a notable strategic benefit of Continental acquiring Cooper rather than Kumho would be that the former would propel the company’s market share in the all-important U.S. passenger and light truck/SUV replacement tire market “from a middle-of-the-pack player to a market leader along with Michelin, Goodyear, and Bridgestone.”

According to Mitchell’s latest report on Cooper, Northcoast Research is raising its price target on shares of Cooper Tire & Rubber stock for two reasons:

1. “to reflect greater confidence that the company will be able to effectively manage the price/mix-to-raw material equation in a modestly rising raw material environment following our latest channel checks that suggest pricing in the U.S. remains rational and destocking activity is having a positive impact on inventory levels,” and

2. “our opinion that Cooper Tire & Rubber deserves to trade at multiples that are at least in-line with the peer group given its above-average operating and financial performances in recent years and minimal exposure to the more cyclical OE channel.”

Mitchell was quick to add that the new price target “does not include any benefit associated with our belief that the company remains an attractive acquisition target.”

However, he adds the shares “could fetch $50 or more in a takeout scenario given the significant discount on a replacement cost basis and the company’s concentrated exposure to the North American passenger and light truck/SUV replacement tire market (which) makes it easier to harvest synergies.”

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