Tire prices may be too high, says analyst

July 17, 2011

In February, BB&T Capital Markets thought Cooper Tire & Rubber Co. -- and the industry -- might have trouble offsetting rising raw material costs with price increases. (Click here for more information.)

Cooper and the industry proved to be up to the challenge. And now, five months later, that is a problem, according to Tony Cristello, managing director of equity research for BB&T.

"We have been concerned for some time that the magnitude of price increases implemented by the tire manufacturers over the past 12-18 months, while necessary to offset the margin impacts of escalating raw material prices, would lead to declining unit sales as end users would not be able to absorb the full brunt of higher tire prices given ongoing budgetary constraints," he says.

"Channel checks in recent months have confirmed our concerns as the tire category has underperformed at service shops, and with supplier fill rates now much improved, we believe that manufacturer tire shipments are likely to remain soft barring a rebound in end user demand."

(According to the Rubber Manufacturers Association, light vehicle replacement tire shipments for RMA members and the industry as a whole were down 2.7% and 5.3%, respectively, in June.)

While we expect lower raw material input prices over recent months to serve as a partial offset, we are lowering our 2011 and 2012 EPS for (Cooper)... to reflect our reduced volume assumptions."

BB&T's rating on Cooper's stock remains Hold(2).

BB&T Capital Markets is a division of Scott & Stringfellow Inc., a registered broker/dealer subsidiary of BB&T Corp.

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