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Cooper holds onto Hold(2) rating from BB&T

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In its latest report, BB&T Capital Markets maintains its Hold(2) rating on Cooper Tire & Rubber Co.'s stock. Rising raw material costs, particularly "the substantial escalation in natural rubber prices," are holding growth back.

"Our biggest concern in owning (Cooper stock) right now is that benefits from price increases and favorable mix shifts are unlikely to fully offset the impact of higher raw material input costs leading to gross margin -- and earnings -- compression," says Tony Cristello, managing director of equity research for BB&T.

The company is lowering its estimates by 46 cents to $1.98 in 2011, and by 60 cents to $2.10 in 2012, as a result of significant price increases in natural rubber in January.

And the worst may not be over, according to Cristello.

"Natural rubber production typically declines by 20-30% in February, March, and April, relative to monthly averages, due to the leaf-shedding season," he says. "With severe flooding continuing in recent weeks, the supply situation has escalated further as buyers scramble for raw materials heading into the seasonal production trough.

"While speculation and defensive hoarding by strategic buyers is likely behind a portion of the spike, our thought is that rubber prices are likely to remain at record highs in the near term, at least until we move into the later spring/early summer when production picks up again."

He expects stabilization later in the year. "Eventually, we expect the acuity of the current supply/demand imbalance to diminish as natural rubber stocks are replenished, particularly as elevated price levels should incentivize additional tapping activity.

"In the near-medium term, this should be a positive development to supply; longer term, the implications are less clear, as elevated natural rubber prices can motivate farmers to continue tapping older, less productive trees and hold off on replanting activities."

BB&T Capital Markets is a division of Scott & Stringfellow Inc., a registered broker/dealer subsidiary of BB&T Corp.

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