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Why BUY Cooper: Ludwig counts the ways

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Tire industry analyst Saul Ludwig is still bullish on Cooper Tire & Rubber Co.'s stock. He rates it as "BUY."

Ludwig, a managing director at Northcoast Research Holdings LLC, doesn't appear frightened by rising raw material costs.

"Cooper just moved prices higher for the second time in 2011," he says. "The first was a 2-1/2% increase effective Feb 15 and this week it announced an increase of 8.5% to be effective Mar 15 (see "Cooper will raise consumer tire prices March 15").

"The race between prices and raw materials is hard to gauge in the short term, thus increasing odds of earnings variances vs. expectations. However, looking over the last five years, the tire industry has done a masterful job in pricing to recover higher raw material costs, even though some quarters feel a pinch."

Ludwig says Cooper plans to increase global tire production by 10% this year, which will help the company meet the increasing demand for its tires in the United States and abroad. In China, where Cooper sells 20-25% of its global tire volume, industry conditions are very strong.

"Besides price/raws issues, Cooper’s challenge is how to get more supply without building a new plant. It is actively looking to purchase all, or part, of an existing facility in a low cost country.

"Absent that, it has the ability to expand (physically) its plant in Mexico and/or double the annual production from five to 10 million tires at its Cooper-Kenda plant in China. So far, no decisions on either option have been made, but are being considered, in our opinion."

Cooper will release its fiscal 2010 results on Feb. 25. Ludwig expects the company's balance sheet to reflect "a near net-debt free position, giving Cooper the strongest balance sheet in the global tire industry."

Although Cooper may have a very challenging first quarter of 2011, the company has a lot going for it, according to Ludwig.

"Yes, volatile and frequent changes in selling prices and raw material costs make it especially difficult to pinpoint 2011 earnings per share, but the main message herein is that a) prices do eventually catch up with raws, and Cooper is not timid about moving its prices when needed; and b) so many other things are going well for Cooper Tire. This stock will, in our opinion, move higher and as such, we reinforce our BUY rating."

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