Cooper Tire & Rubber (NYSE:CTB), a company that's been running down every pockmarked road these days, seemed to find another hole to blow a tire in when it released third-quarter results.
You can get the raw data in this Fool by Numbers article, but the crux of the problem remains the tire maker's North American operations. While revenues grew 28% year over year, the strength of sales from its China operations -- facilities it bought earlier this year -- allowed the company to grow as it did.
But that was not enough to turn a profit. Cooper experienced $10 million in expenses for its North American turnaround initiative, dubbed "Sunrise," which seeks to cut inventory by $100 million by the end of 2007, implement $70 million in cost reductions, and increase profits in North America by $100 million by the end of next year. North America generates 70% of Cooper's revenues, and the market's been running on rims for a few years now.
Management has sworn to achieve the goals without closing any manufacturing plants, which should make workers heave a sigh of relief, considering the tough stance rival Goodyear (NYSE:GT) is taking with its union members. Instead, the company will be consolidating its distribution centers, going from four facilities down to one.
Yet management admits it can no longer run its U.S. plants at full capacity, like it's done the past few years. Instead, it'll be shifting a lot of manufacturing capacity overseas, particularly to China, and running homegrown plants on a flex-time basis. Cooper will let workers in Texarkana make less popular tires in smaller lots, thus allowing most everyone to still work. That plant will see production drop from 10 million units this year to 6.7 million by the end of next year.
Yet even though the earnings numbers weren't great, they also weren't as bad as had been anticipated, and the stock has risen by about 10% over the past two days. As if the company were carrying a can of Fix-a-Flat in its trunk, it seems able to limp along for another day.
Like all tire manufacturers, Cooper has been suffering from increased costs due to higher raw-material prices, particularly for oil and rubber, the two key ingredients in the manufacture of tires. As a result, margins have been severely squeezed. Cooper is seeing some of those costs ameliorate, and it expects both the fourth quarter of 2006 and the first quarter of 2007 to show better raw-material costs, which should help ease the margin constraint.
Additionally, by moving production overseas to China, the company should see an immediate effect on gross margins in the U.S. Those Chinese-produced tires are planned for use in the North American market as entry-level tires. Essentially, they will be lower-cost tires sold at a higher price (consumers have apparently accepted higher tire prices by all manufacturers), thus generating higher profit margins.
Cooper Tire seemed to be late in realizing it was in trouble, and CEO Thomas Datillo figuratively committed hara-kiri by resigning when the second-quarter results reported earlier this year were worse than expected. Nice gesture, but it doesn't help Cooper turn around. Besides, this was a profitable company for four of the five years Datillo was at the helm. He also cost Cooper $5 million in severance expenses this quarter.
The tire maker has set the bar high for itself with an ambitious turnaround plan, even as it seeks a permanent replacement for the top spot in the company. It's already reduced inventories by $40 million, and while it only expects to achieve $42 million in savings on its Sunrise project, it expects its "profit improvement run rate" to be $100 million.
It's tough to say that a company that's been up on blocks for so long will suddenly be able to rev its profit engines for a last charge to the finish line next year. But Cooper does have a plan in place, it is benefiting from the easing of raw materials prices, and it has several overseas facilities that can produce popular tires at a lower cost, which it can then sell for more. Sounds like Cooper might be ready to roll.
Roll on with these related Foolish articles:
- Goodyear's Workers Hit the Road
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- Tire Makers More Than Just Retreads
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
