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Cooper Tire stock ratings are hit hard by raw material shortages

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Following the first nine months of the year, two investment firms put Cooper Tire & Rubber Co.'s stock on "Hold."

 

Saul Ludwig, managing director of KeyBanc Capital Markets Inc., says raw material shortages (mainly synthetic rubber) and lower volume led to less efficient plant operations in the third quarter. In addition, raw material costs were expected to hit the company hard in 3Q 2008.

 

"Our (third quarter) estimate is lowered to a loss of 90 cents per share versus our prior estimate of a loss of 42 cents," he says. Fourth-quarter per share results now are expected to be a loss as well.

 

The full-year estimate has been changed from a loss of 70 cents to a loss of $1.45. For 2009, Ludwig's earnings per share estimate is now 20 cents, which was lowered from 60 cents.

 

His rating for Cooper remains on Hold.

 

"While price hikes are certainly a plus, the price mix/raw material cost spread could be negative $45 million in the third quarter, in contrast to positive $10 million in 1Q08 and negative $10 million in 2Q08. The spread has worsened."

 

Cooper remains financially strong, he says, but the downward spiral in the company's earnings "is a disconcerting trend."

 

Tony Cristello, senior vice president of Equity Research for BB&T Capital Markets, is downgrading Cooper's stock to "Hold (2)" from "Buy (1)."

 

"Our Buy (1) rating had been based on the belief that continued price increases... coupled with an eventual retreat in raw materials costs would provide significant leverage to the Cooper Tire model once the environment normalized," he says.

 

"However, after recently learning that Hurricane Ike disrupted key

shipments of synthetic rubber inputs, forcing Cooper to temporarily halt production at its North American plants from Sept. 23–28, we are

lowering our estimates and our rating to Hold (2)."

 

BB&T's new third- and fourth-quarter loss estimates were based on unabsorbed overhead from the Hurricane Ike production shutdown; a further-than-expected time lag in the impact of raw material price reductions; and weaker North American sales from reduced unit shipments and "price and mix assumptions."

 

"We continue to believe that many of Cooper Tire's internal initiatives will ultimately drive improved profitability, and view the current risk/reward balance as favorable," says Cristello.

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