Foolish Forecast: An Inflated Cooper Tire

• Email
• Share
• Print

Cooper Tire & Rubber (NYSE: CTB) will report Q4 2006 financial results on Thursday, March 1, while hoping to avoid any flat tires.

What analysts say:

• Buy, sell, or waffle? With seven analysts covering the tire maker, they're pretty well balanced in their opinions: three say hold, two say buy, and two say sell.
• Revenues. With no road hazards in sight, sales are expected to jump 29% to $738.6 million on the strength of the Chinese manufacturing plants acquired last year.
• Earnings. Profits are expected to improve, too. Well, Cooper is expected to break even, which is miles ahead of the $0.11 per-share loss it reported last year.

What management says:
Like Goodyear (NYSE: GT) before it, Cooper Tire is in the midst of a restructuring and turnaround plan. Costs in North America, particularly labor, have long been a drag on performance, and like other tire makers, Cooper is transferring some production to lower-cost countries like China. It also had the problem of high inventories and had to temporarily shut down some U.S.-based plants to reduce the problem, which also served to escalate expenses.

Yet the North American tire market had brisk sales, and Cooper was able to increase prices to help offset the steady rise in costs for raw materials. Expect it to have gained some market share this quarter. The prolonged strike at Goodyear probably benefited Cooper, along with several foreign tire manufacturers.

What management does:
One-time expenses hit last quarter, and if you subtract them, it looks like the beginnings of a turnaround. Oil comprises a large portion of the costs in making a tire, as does rubber, and both continue to be at near-record costs (though they're down slightly from year-earlier points). With the costs of temporarily shutting down its plants behind it and inventories at reduced levels, Cooper should see the fourth quarter improved, particularly with the new capacity from its Chinese operations.

Margin	09/05	12/05	03/06	06/06	09/06
Gross	9.2%	8.7%	8.1%	7.4%	6.8%
Operating	1.3%	1.2%	0.7%	-0.1%	-0.6%
Net	6.2%	-0.4%	-0.9%	-1.4%	-2.3%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Cooper Tire has been a troubled tire maker for several years now. Its turnaround has been recognized in the marketplace, however, and its stock has doubled from the nadir it reached last summer. Yet the price appreciation has also driven its valuation much higher, and in fact it appears twice as rich as Goodyear's. That company is much further along in its turnaround. While the quarter may be good to Cooper and see it gain some market share at Goodyear's expense, the strike is behind it and it has long had operations set up overseas. Considering the continued trouble in the American auto industry, I don't find Cooper to be a particularly attractive value at these prices.

Related Foolishness:

• Cooper Tire Running Flat
• Goodyear Worker's Hit the Road
• Cooper Tires Got One Spare
• Foolish Fundamentals: Margins

Cooper Tire has earned a two-star rating from Motley Fool CAPS, the new investor intelligence community. You can add your voice to the stock-rating service by joining today. It's free!

Fool contributor Rich Duprey owns shares of Goodyear but does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.