Net income was down. Net sales were down. Operating income was down. But Cooper Tire & Rubber Co.’s first-quarter results are misleading, according to industry analyst Nick Mitchell.
The loss of revenue from Chenghshan (Shangdong) Tire Co. Ltd. (CCT), which was sold at the end of 2014, was mainly responsible for the 16.7% decrease in sales. That didn’t keep Cooper Tire from increased profitability: The company improved its first-quarter income-to-sales ratio from 5.6% in 2014 to 6.2% this year.
“Cooper Tire started 2016 off on a high note as first-quarter 2016 earnings per share came in at $1.05, which was well above our estimate of $0.93 and consensus of $0.97,” says Mitchell, senior vice president and research analyst at Northcoast Research Holdings LLC.
“Relative to our model, the earnings surprise was primarily driven by a smaller-than-expected loss in the International Tire Operations segment and a lower-than-anticipated global tax rate, driven largely by discrete tax items.”
(Cooper Tire posted net income of $41 million on net sales of $663 million for its first quarter ended April 29, 2016. For more information on its 1Q financials, click here.)
“Net sales decreased 2.0% to $649.8 million versus our estimate of $670.9 million and consensus of $673.0 million,” he says. “The miss on the top-line was driven by weaker shipments in the Americas Tire Operations segment, primarily due to an unexpected decline in the shipments of private label tires against tough comparisons.”
However, consolidated operating income increased 29.5% to $91 million, which was $3.5 million more than Northcoast Research estimated. “Consolidated operating income increased as a result of $23 million of favorable raw material costs, net of price and mix, and lower SG&A (selling, general and administrative) and product liability costs, slightly offset by higher manufacturing costs and currency headwinds.”
As a result of Cooper Tire’s 1Q results, Northcoast is lowering its 2016 operating income and EPS estimates to $387.2 million ($7.5 million lower) and $4.29 ($0.01 lower), respectively.
“The tempered outlook largely reflects management’s decision to accelerate some of the manufacturing improvement projects within the U.S. plants,” says Mitchell.
“Management is doing an excellent job executing against the strategic plan that they presented at the 2014 analyst day despite the headwinds from losing the controlling stake in CCT, as volume trends in key operating regions have generally met or exceeded the local market trends. More importantly, the team continues to modernize the U.S. plants in order to drive efficiency gains to ensure long-term cost competitiveness, as well as invest in the existing plants in Serbia, Mexico and China to support intermediate-term growth plans.
“Notwithstanding the major, but somewhat unpredictable tailwind from falling raw material prices, and any short-term volatility in the competitive backdrop in the U.S., the risk/reward ratio looks fairly balanced at these levels given the uncertainty of price/mix-to-raw material trends in 2016. As such, we are maintaining our ‘Neutral’ rating on Cooper Tire.”
