February 12, 2015 Cooper Tire & Rubber Co. Current Recommendation Prior Recommendation Neutral Date of Last Change 08/19/2014 Current Price (02/11/15) $36.75 Target Price $44.00 OUTPERFORM (CTB-NYSE) SUMMARY Cooper Tire is benefiting from high-performance products and improving business operations since the termination of the Apollo Tyres merger agreement. The accelerated share repurchase program is also expected to have a positive impact on future earnings per share. Cooper Tire reported earnings of $0.77 per share in the third quarter of 2014, which surpassed the Zacks Consensus Estimate of $0.72 and improved from breakeven results in the prior-year quarter. Revenues rose 11% to $920 million, beating the Zacks Consensus Estimate of $907 million. The improvement came on the back of higher unit volume, partially offset by unfavorable price and mix. Thus, we are maintaining our Outperform recommendation on Cooper Tire. SUMMARY DATA 52-Week High $36.75 52-Week Low $22.82 One-Year Return (%) 57.93 Beta 1.56 Average Daily Volume (sh) 721,754 Shares Outstanding (mil) 58 Market Capitalization ($mil) $2,132 Short Interest Ratio (days) 3.47 Institutional Ownership (%) 89 Insider Ownership (%) 3 Annual Cash Dividend $0.42 Dividend Yield (%) 1.14 5-Yr. Historical Growth Rates Sales (%) 3.6 Earnings Per Share (%) 4.3 Dividend (%) 0.0 using TTM EPS 15.4 using 2014 Estimate 13.6 using 2015 Estimate 12.7 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page Risk Level * Below Avg., Type of Stock Mid-Blend Industry Rubber-Tires Zacks Industry Rank * 114 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 984 A 1,058 A 1,096 A 1,062 A 4,200 A 2013 862 A 884 A 832 A 861 A 3,439 A 2014 796 A 889 A 920 A 806 E 3,411 E 2015 687 E 779 E 807 E 7302 E 3,003 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 $0.34 A $0.82 A $1.17 A $1.15 A $3.48 A 2013 $0.87 A $0.55 A $0.00 A $0.31 A $1.73 A 2014 $0.71 A $0.59 A $0.77 A $0.63 E $2.70 E 2015 $0.81 E $0.80 E $0.78 E $0.50 E $2.89 E Projected EPS Growth - Next 5 Years % N/A 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 111 North Canal Street, Chicago IL 60606
OVERVIEW Cooper Tire & Rubber Co. (CTB), headquartered in Findlay, OH, manufactures and markets tires and related products. The company has more than 72 manufacturing, sales, distribution, technical and design facilities located in 11 countries across the world. Cooper Tire is the eleventh largest tire company globally and the fourth largest tire manufacturer in North America. Cooper Tire's operations are organized into two geographical business segments: Americas Tire Operations (accounting for about 70.9% of revenues from external customers in the first nine months of 2014) and International Tire Operations (29.1%). In the Americas Tire Operations segment (previously North American Tire Operations), Cooper Tire produces automotive, motorcycle and truck tires, tread rubber and equipment. The manufacturing facilities are located in Ohio, Georgia, Mississippi and Arkansas. The segment focuses on passenger and light-truck replacement tires, and caters to independent tire dealers, wholesalers and retail chains in the U.S. The group is mainly tied to the aftermarket for tires and parts, and does not sell directly to original equipment manufacturers (OEMs). Through the International Tire Operations segment, Cooper Tire produces passenger car, light truck, motorcycle and racing tires in the U.K., Serbia and China. In the U.K., the segment manufactures these products in its Wiltshire plant and delivers them primarily to dealers in the domestic market, continental Europe and Scandinavia. In China, the International Tire Operations segment manufactures radial and bias medium truck tires, and passenger and light truck tires through its joint ventures (JV) with Kenda Rubber Industrial Co. of Taiwan (Kunshan plant) and a Chinese company, Chengshan (Shandong) Tire Co. The manufactured products from China are exported to Europe and North America, and sold through dealers in the domestic market. However, Chengshan Group has decided to purchase Cooper Tire s stake in the Chinese JV, Cooper Chengshan (Shandong) Tire Company Ltd. ( CCT ). REASONS TO BUY Cooper Tire develops high-performance products to cater to the current market demand. The company expects its improving product mix to expand profitability. In Jan 2015, its CS5 Touring tire earned the 2014 GOOD DESIGN Award from the Chicago Athenaeum: Museum of Architecture and Design and The European Centre for Architecture Art Design and Urban Studies. In Oct 2014, Cooper Tire launched two new tires, Discoverer SRX and Discoverer X/T4. Discoverer SRX is a premium sport utility and crossover vehicle tire that provides dependable highway traction in all seasons, along with superior handling and Wear Square. The Wear Square visual wear indicator enables consumers to ascertain the remaining tread life of the tire. Discoverer X/T4 is an all-terrain, four-season tire, designed specially for Canadian drivers. In Sep 2014, Cooper Tire launched its most progressive SUV/light truck tire yet, the Discoverer A/TW, as well as the Discoverer XT-4, both of which deliver strong performance in all seasons and on all terrains. The company also launched a new winter range, Starfire W200, in Europe and a series of ice tires in China during the third quarter. In Apr 2014, the company launched the CS5 Touring, which is its best passenger touring tire so far and also introduced Wear Square. The company aims to attain operating profit over 10% and net sales of $5 $6 billion per annum in the long term. It plans to reduce its manufacturing costs by 14% by 2017 through increased automation in production facilities and consolidation of product family. Cooper Tire also plans to maintain a sustained annual operating profit of 8 10%. It intends to reduce the number of global Equity Research CTB Page 2
product families by 60% by 2020. This will lead to simplification of the manufacturing process, lower costs, higher sourcing flexibility and faster product development. In the Americas Segment, Cooper Tire aims to improve margin and mix on the back of sales growth, product launches, capacity conversion to focus on premium products and expansion in markets with relatively low penetration. In the International Segment, Cooper Tire aims to enhance sales, so that it can generate half of the company s global revenues. In Aug 2014, Cooper Tire announced an accelerated share repurchase ( ASR ) program worth $200 million with J.P. Morgan Chase Bank. The program will extend from Aug 7, 2014 through Feb 2015. The ASR will significantly reduce the outstanding shares of the company, thus having a positive impact on future earnings per share. Cooper Tire is expected to benefit from its business model and the execution of its strategic plans. The company s partnership with Michigan-based automotive startup, Elio Motors, Inc. will have favorable impacts in the long run. According to the deal, Cooper Tire will supply tires equipped with its low rolling resistance technology for Elio Motors ultra-high mileage Elio car. Elio Motors is targeting a mileage of 84 miles per gallon, which will put the car in the ultra-high mileage category. Cooper Tire s low rolling resistance technology will help the company achieve this mileage. After the dismissal of the merger proposal with Apollo Tyres Ltd., Cooper Tire is focusing on improving its business operations. As a result, its earnings have begun to improve. The company is well positioned due to its good-quality brands, loyal customer base, efficient workforce, strong technical capabilities and network of manufacturing facilities. REASONS TO SELL Cooper Tire operates in a very competitive industry. Its peers are bigger companies with greater financial resources who serve OEMs as well as the replacement tire market. Moreover, the competitors have operations in lower-cost countries. If the company cannot improve its operating efficiencies and counter competition from these peers, its results will suffer. The company also faces competition from low-cost producers in Asia and South America. Cooper Tire s Chinese JV partner, Chengshan Group Company Ltd. decided to exercise its option to purchase Cooper Tire s 65% ownership stake in CCT. As a result, in Dec 2014, Cooper Tire sold its share for $262 million net of taxes. This might adversely affect its business, strategic growth plans, financial position, cash flows and results of operations. The company will also lose the profit earned by CCT on selling tires to other Cooper business units, and on any tires sold directly to the customer by CCT. While a commercial offtake agreement requires CCT to produce Cooper-brand products, including Truck and Bus Radial tires, till mid-2018, thereafter Cooper Tire will be solely dependent on Cooper Kunshan Tire for production in China. Thus, the company s future profitability depends on its ability to strengthen the production capacity of Cooper Kunshan Tire or to find another production source to replace CCT s production capacity. Inability to do so could hamper the results of Cooper Tire s International Tire Operations segment, which attained profitability in the last quarter after a long time. Cooper Tire s operating profits are negatively impacted by pressure from cheaper Chinese imports and some problems related to the unsuccessful implementation of Enterprise Resource Planning ( ERP ). Moreover, we are concerned about the fragile global economic conditions, which are likely to weigh on the company s results. Equity Research CTB Page 3
RECENT NEWS Cooper Tire Q3 Earnings Beat Estimates Nov 7, 2014 Cooper Tire s earnings in the third quarter of 2014 increased to $0.77 per share from breakeven earnings per share in the prior-year quarter. Further, the figure surpassed the Zacks Consensus Estimate of $0.72. Net income amounted to $48 million as against net loss of $0.17 million recorded in the third quarter of 2013. The results for the third quarter of 2013 had been affected by loss related to a strike by workers at Cooper Tire s Chinese JV, Cooper Chengshan (Shandong) Tire Company Ltd, costs related to the terminated merger agreement with Apollo Tyres Ltd. and higher costs and lower volume associated with shipping inefficiencies related to ERP system implementations. Revenues of Cooper Tire improved 11% year over year to $920 million in the quarter, beating the Zacks Consensus Estimate of $907 million. The improvement came on the back of higher unit volume, partially offset by unfavorable price and mix. Operating profit increased to $89 million (9.7% of sales) from $28 million (3.4% of sales) a year ago. Segment Details The Americas Tire Operations recorded a 10% increase in revenues to $694 million. Operating profit in the segment improved to $76 million (10.9% of sales) in the reported quarter from $39 million (6.1% of sales) in the third quarter of 2013, driven by favorable raw material costs, higher unit volumes and favorable products liability costs, which offset the unfavorable price and mix, and higher selling, general and administrative costs. The International Tire Operations posted a 19% increase in revenues to $313 million. Operating profit improved to $23 million (7.3% of sales) from $3 million (1.2% of sales) a year ago due to lower raw material costs, higher unit volumes and lower manufacturing efficiencies, which offset the lower price and mix. Financial Position Cooper Tire had cash and cash equivalents of $336 million as of Sep 30, 2014, up from $310 million as of Sep 30, 2013. Long-term debt was $341.1 million as of Sep 30, 2014, translating into a long-term debt-tocapitalization ratio of 27.6% versus $344.3 million of debt and long-term debt-to-capitalization ratio of 28.4% as of Sep 30, 2013. Dividend Update On Dec 30, 2014, Cooper Tire paid a quarterly dividend of $0.105 per share to stockholders of record as of Dec 4. Outlook Cooper Tire expects raw material costs to decline slightly, sequentially, in the fourth quarter of 2014. In the long run, raw material costs are expected to increase. For 2014, capital expenditures are expected between $175 million and $185 million. Equity Research CTB Page 4
VALUATION Shares of Cooper Tire are currently trading at 13.6x our 2014 EPS estimate of $2.70. The company s current trailing 12-month earnings multiple is 15.4x, compared with the 12.6x average for the peer group and 19.0x for the S&P 500. Over the last five years, shares of Cooper Tire have traded in a range of 6.2x to 19.1x trailing 12-month earnings. The stock is trading at a 19.3% premium to the peer group, based on the forward earnings estimate for 2014. Our long-term Outperform recommendation on the stock indicates that it will perform better than the broader market. Our target price of $44.00, which is 16.3x our 2014 EPS estimate, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Cooper Tire & Rubber Co. (CTB) 13.6 12.7 N/A 8.0 15.4 19.1 6.2 Industry Average 11.4 8.8 8.2 6.8 12.6 33.0 6.1 S&P 500 16.5 15.4 10.7 15.1 19.0 19.4 12.0 Goodyear Tire & Rubber Co. (GT) 8.5 7.7 N/A 4.3 8.6 33.8 5.4 Bridgestone Corp. (BRDCY) 9.8 9.0 N/A 6.6 10.3 57.1 8.7 Amerityre Corp. (AMTY) N/A N/A N/A N/A N/A N/A N/A TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Cooper Tire & Rubber Co. (CTB) 2.4 3.6 1.3 14.3 0.3 1.2 4.9 Industry Average 2.3 2.3 2.3 0.7 0.7 0.7 4.5 S&P 500 5.3 9.8 3.2 25.5 N/A 2.1 N/A Equity Research CTB Page 5
Earnings Surprise and Estimate Revision History Equity Research CTB Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of CTB. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1036 companies covered: Outperform - 15.9%, Neutral - 77.7%, Underperform 5.4%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research CTB Page 7