Sometimes I put my money where my mouth is. When I saw that Goodyear
Consider Cooper Tire
What I did do was put it in my Motley Fool CAPS "portfolio," a place where average investors like you and me can match wits with more than 28,000 professional and novice investors alike to test our investing skill and prowess. I should have had the fortitude to do that with my real portfolio. My Cooper CAPS stock has more than doubled since and is my best-performing investment there.
Scooping up Cooper
Let's look more closely at why the market was right to back the tire maker and I was wrong to only put it in my "funny money" pot. Cooper picked up market share as the strike at Goodyear took a heavier toll than I imagined it would. Where Goodyear reported a 10% decline in North American tire sales, Cooper reported an 8% increase. While unit sales were down at both manufacturers, Cooper was able to make it up via price increases, while Goodyear offset it through an 11% increase in international sales. North American tire operations generated $28 million in profits for Cooper.
Cooper's China operations also played a large role in the tire maker's international tire sales. The Asian division saw sales double in the quarter as it benefited from having a full quarter's worth of sales from Cooper Chengshan, which it acquired in the first quarter of 2006. That acquisition was enough to power Cooper to record sales in Europe, and the international division ended with $183 million in revenues.
In short, Cooper was able to cut costs, raise prices, and boost sales -- all of which translated into the stunning rise in its stock price over the past two months. The juxtaposition with Goodyear as it began its turnaround is striking. It, too, had doubled in price, rising from $4 to $8 per share, but then I had seen investment value in Goodyear. So where do I see Cooper going now? While I hate to say it, I think Cooper is really overvalued at these levels.
The rich are very different
Comparing its enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization), at a ratio of 11, it's trading as much as two times its historical averages and is valued at more than 150 times operating profits, if for no other reason than that it has recently regained profitability after several years of losses. In comparison, Goodyear trades at just seven times EBITDA and 15 times operating income. Yet over the past two months, both stocks have tracked pretty evenly, though when we stretch it out to a year, Goodyear has been the better investment.
That doesn't mean that Cooper wasn't a good stock to own and that, despite the signals, I missed the opportunity. But when we look at whether Cooper is priced to perfection at current levels and whether any miscues (internal or external) befall it, I'm willing to risk opening my mouth wide enough to insert my foot and say that it is.
Fool contributor Rich Duprey owns shares of Goodyear but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.