Tony Cristello, senior vice president, equity research for BB&T Capital Markets, is lowering the company's stock rating for Cooper Tire & Rubber Co. from Buy (1) to Hold (2).
The decision follows the recent release of Cooper Tire's quarterly financial results. Cooper reported net income of $44 million on net sales of $804 million for its second quarter ended June 30, 2010. That compares to a net loss of $13 million on sales of $632 million for the same period in 2009.
Why the downgrade? "Typically, too much demand and an aggressive pace to production yields solid upside," says Cristello. "Unfortunately, in this instance, aggregate demand levels for Cooper’s product have likely exceeded even management’s most optimistic forecasts, and the closure of the company’s Albany, Ga., plant has left the company scrambling to bring additional capacity online."
(Cooper says its second-quarter light vehicle tire shipments in North America were up 25% compared to 2Q 2009, while total industry shipments increased 7%.)
"Ultimately, we believe that the rationalization of Cooper’s North American production footprint (from four plants to three) has made Cooper a leaner, and more profitable enterprise. That said, it is a situation where we believe the net 'savings' from the initially forecasted $75 million to $80 million in cost savings from the restructuring of (Cooper's) plants is being negatively impacted to a greater extent than we initially expected."
Cristello says that BB&T is "comfortable" with Cooper's ability "to bring about the necessary operational changes... to rebuild its inventory levels and meet targeted fill rates, all while from a smaller network." However, the incremental costs associated with such changes "are likely to drag on results" through at least the fourth quarter.
Cooper's stock price on the New York Stock Exchange closed at $18.27 a share on Wednesday, Aug. 11, 2010.
