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Why the prices are right for Cooper's success

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What do scheduled price hikes from Goodyear Tire & Rubber Co., Michelin North America Inc. and Continental Tire the Americas LLC have in common? They all should have the effect of strengthening Cooper Tire & Rubber Co.’s prices in the fourth quarter of this year.

They also should make Cooper tires more competitive from a price standpoint, according to  tire industry analyst Saul Ludwig, who maintains his "Buy" rating on Cooper's stock. “We’d expect to soon hear from Cooper on its pricing moves.”

Ludwig, a managing director at Northcoast Research Holdings LLC, has lowered his earnings per share estimates for both the second half of this year and 2012 “due entirely to a reduced industry volume outlook.” Yet he maintains his “Buy” rating for many reasons.

“The problem at Cooper is macro in nature versus company specific problems. Industry sales of broad line tires are soft and 40% of Cooper’s volume is broad line. Internally, it is operating well (and) efficiency is excellent, albeit influenced by volume.”

He lists other positive factors.

* Pricing is catching up with costs. “Raw materials have finally begun to flatten!”

* Dealers remain very positive, especially some of the largest dealers in the country. “Some dealers told us they began to rebuild inventories in August.”

* The tariff on imported Chinese tires drops by 5% this month to 29%. “Cooper, who has been importing about 3 million units annually from one of its plants in China, will likely try to keep that 5% versus giving it back in price -- a small positive going forward.”

Pent-up demand also bodes well for Cooper. “The most disadvantaged consumer who has deferred buying broad line tires eventually returns although timing is difficult to predict."

Ludwig says bottom line, Cooper is a well-run company. “Dealers like it, finances are very strong, it has large market shares in North America and China, and a high yield. It has increased its production capabilities in low cost countries (Mexico and China), and it is the principal U.S. producer serving the value segment of the market.”

Being the lone remaining domestic producer of value tires, its dealers want Cooper to be successful, he adds.

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