Ludwig: Prices will drop when tariff drops off

July 20, 2012

Saul Ludwig, a managing director at Northcoast Research Holdings LLC, has maintained his company's "Buy" stock rating for Cooper Tire & Rubber Co.

There are a number of reasons, the upcoming elimination of the tariff on consumer tires imported from China among them.

"When the tariff ends, prices on Chinese tires may decline 12% to 15% due only to the tariff expiration, but with raw material costs declining, the actual price declines on Chinese imported tires may be more than 12%-15%," he says. "Of course, not having to pay the tariff mitigates the price reduction.

"Cooper believes -- and we agree -- that in just looking at the tariff, price reductions on its broad-line tires might be about the same as the tariff savings and as such, have no noticeable impact on profitability."

Ludwig says that volume in the value segment of the market in the third quarter may be sluggish as dealers wait to see what impact the tariff expiration has on prices. "They will not want to risk having inventory that could become devalued."

As such, dealers -- especially wholesale distributors -- will buy "only what they need to meet consumer demand," and possibly even cut inventories where possible.

"While the tariff expiration brings with it uncertainty as to near term pricing, we note that in all of our recent contacts with Cooper dealers, they reinforce their positive view about Cooper and their intention to do more business with them in the future."

There are other positives in the Cooper camp, says Ludwig.

"Cooper has made great strides in boosting share in the SUV, light truck, high performance and medium truck tire segments, and that trend is expected to continue. Also, in 3Q '12, Cooper’s raw material costs will fall, and based on our dealer contacts, Cooper’s 3Q '12 pricing is down only slightly, suggesting that its price/raws spread will widen and enable it to achieve the earnings we now predict."

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