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Strategic plan points Cooper in the right direction, says analyst

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Cooper Tire & Rubber Co.'s three-to-five-year strategic plan is an indication of its potential. That is why KeyBanc Capital Markets Inc. recently retained its "AGGRESSIVE BUY (1)" rating.

KeyBanc Managing Director Saul Ludwig says the strategic plan "points to greater attention to operational excellence," and sets the following goals:

* growing volume at two times the market's growth;

* realizing operating margins of 7% to 8%.

Cooper "has defined its strategy and outlined financial objectives for the next three to five years. We had expected a more definitive

definition as to how it is going to deploy its capital, but that level of detail was not provided," says Ludwig.

"Nevertheless, we believe that it will use excess cash to repurchase debt, buy back shares, and continue to invest in low-cost manufacturing.

"At this time, we sense that (Cooper) is more focused on how it is going to achieve operational excellence and organically grow the company. Certain capital has already been earmarked for projects in China, and those projects will be completed as initially planned."

KeyBanc feels Cooper is more inclined to invest new capital in Mexico rather than in China, according to Ludwig.

"Over the next few years, producers of tires in China will see rising wages, higher freight costs, additional taxes and a stronger currency such that a more efficient -- and shorter -- supply chain will offset the cost benefits that China might offer, in our opinion.

"The landed cost gap between producing tires in China vs. the United States -- now at 10-15% -- will likely narrow. That may well explain why companies including Pirelli, Toyo and Kumho -- all having plants in China -- decided to build new plants in the United States."

Cooper is "still short of tires," according to Ludwig. In addition, raw material costs in the first quarter "increased faster than expected." But the company's Feb. 1, 2008, price increases should pay off starting in the second quarter.

"While we do not expect (Cooper's) shares to move up sharply in the near future due to a tepid (first quarter) and rising raw material costs, we believe that the current share price offers investors an excellent opportunity to establish a position in (Cooper)."

In fiscal 2007, Cooper recorded net income of $120 million (compared to a net loss in fiscal 2006) on sales of $2.9 billion. Comparative sales were up 13.9%.

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