Headquartered in Novi, Michigan, Cooper-Standard Holdings Inc (COSH.PK) is a leading global supplier of systems and components for the automotive industry. COSH's products include body sealing, thermal and emissions, fluid and anti-vibration systems. It employs more than 21,000 people globally and operates in 19 countries around the world.
COSH is the largest global producer of body sealing systems and the second largest global producer of the types of fluid handling products that it manufacture. It is also one of the largest North American producers of anti-vibration systems. COSH's products were found in each of the 20 top-selling models in North America and in 19 of the 20 top-selling models in Europe in 2011.
Variant Perceptions And Catalysts
COSH suffers from an over-reliance on the U.S. primary automobile market. North America accounted for 49% of COSH's 2011 sales and COSH currently has a limited presence in the aftermarket. But that is expected to change in the near-term with the appointment of a new CEO and its inaugural appearance at the 2012 Automotive Aftermarket Products Expo this year.
Mr. Jeffrey S. Edwards took over from Mr. James McElya as President and Chief Executive Officer of the company, with effect from October 15, 2012. During COSH's third quarter 2012 earnings call on November 9, 2012, Jeffrey Edward laid down his first hundred day plan, which included growing COSH's Asian business. This is hardly surprising, given that Jeffrey served as the group vice president and general manager of the Automotive Experience Asia group for Johnson Controls, Inc. (JCI), before joining COSH. While COSH is already benefiting from a highly diversified customer base that has more than doubled in Asia and South America in recent year, Jeffrey comes with the right skills and experience to further strengthening COSH's position in Asia. Moreover, COSH is lagging behind its closest competitor in the fluid system segment, TI Automotive, which derives approximately a quarter of its sales from Asia, including China. The Asia Pacific region accounted for only 8% and 4% of COSH's 2011 and 2004 revenue respectively; there is a huge potential for growth. COSH is already forming joint ventures in Asia with partners such as HASCO and Nishikawa Thailand, providing products to Honda (HMC), Toyota (TM), Indian OEMs, key Chinese OEMs and SAIC (SAI) and their joint venture partners.
COSH is also making significant headway into non-traditional Cooper Standard markets such as growth opportunities in the aftermarket. It debuted its global Performance Products Group during its first ever appearance at the 2012 Automotive Aftermarket Products Expo in October this year. COSH's Performance Products Group is positioned as a global supplier committed to providing high quality engineered and catalog products and systems, which will allow COSH to expand its current products and future thermal products into a range of industries, including commercial vehicle, off-highway, power sports, marine, construction and other specialty markets. It will leverage its existing technical capabilities to capitalize on upcoming growth opportunities in the aftermarket and the significant global growth in sectors adjacent to the light vehicle market. COSH estimates the size of the addressable market at more than $2 billion.
Most investors typically perceive pink sheet stocks as thinly traded, inferior stocks which are unable to meet the listing requirements. This is not entirely the case with COSH. Firstly, COSH has a 30 day and 3 month average trading volume of 38,935 shares and 23,553 shares respectively. The numbers are not going to impress many people, but it still trumps a majority of pink sheets with no shares traded for days or weeks in a row. Secondly, there is a big difference between intention and ability when it comes to listing matters. On September 1, 2011, COSH announced that it was retaining investment bankers to evaluate strategic alternatives including an initial public offering or a sale of the company. A month later, on October 24, 2011, COSH decided to discontinue its evaluation of a possible sale of the company due to market conditions. A Reuters article dated October 12, 2011, named Carlyle Group (CG), Cerberus Capital Management and Platinum Equity as potential suitors for COSH, with the company reported valued at $1.5 billion - more than two times its current valuation. I am highlighting the potential sale of COSH to private equity firms to illustrate the quality of COSH; private equity firms such as Carlyle will not invest in companies which cannot be listed on an exchange or sold through a trade sale. COSH made the decision in October 2011 to remain unlisted, because market conditions were unfavorable at that point in time, not because it could not meet the requirements of an initial public offering.
With the planned sale of the company behind it, COSH is refocusing its attention on growing the business and returning excess capital to shareholders. The October 24, 2011 announcement was followed by two acquisitions and the initiation of a share repurchase program in 2012. COSH announced its acquisition of the automotive sealing business of Sigit S.p.A. and the patents and other intellectual property rights and assets of EDC Automotive LLC on January 10, 2012 and April 3, 2012 respectively. On November 9, 2012, COSH's Board of Directors approved a securities repurchase program authorizing COSH to repurchase, in the aggregate, up to $25 million of its outstanding common stock, 7% cumulative participating convertible preferred stock or warrants to purchase common stock.
Investors who look for balance sheet strength and credit quality may be still stuck with impression of COSH's previous incarnation as a highly geared automobile market proxy. COSH is not the same debt-laden company that filed for Chapter 11 in August 2009. Former Chief Executive Officer James McElya led the company through a debt-for-equity swap and a process of deleveraging, reducing its $1.1 billion debt then to its current net debt levels of $264 million, as at September 30, 2012. In addition, COSH now has a healthy net leverage ratio of 0.9 and a decent interest coverage ratio at 6.8x. COSH also face minimal refinancing risks if credit markets tighten this time, as it has no major debt maturity until 2018.
It is a case of a tale of two market for COSH. The developed market is recovering at a slow pace; while the long term growth story for emerging markets remains intact. North America, Europe, Asia Pacific and South America accounted for 49%, 38%, 8% and 5% of COSH's 2011 sales respectively. Based on projections from IHS Inc, North American vehicle production in 2012 is expected to increase by 15% from 2011, benefiting from pent-up demand and heavy fleet activity in the first half of 2012, with steady growth through 2013. The Eurozone crisis, coupled with overcapacity issues affected French and Italian OEMs badly with vehicle production for 2012 expected to decline by 6% as compared to 2011 and flat into 2013. The Asia Pacific region continued to grow in 2012, albeit at a slower pace, with China and India vehicle production projected to grow at 8% and 4% this year respectively. Brazil's vehicle production growth is expected to be flat in 2012, with future growth driven by government tax incentives and increased availability of automobile credit. The IHS Global Vehicle Production Forecast projects more than half of global vehicle production to come from emerging markets over the next five years, driven by the growth of light vehicle markets. South America and Asia accounted for a mere 13% of COSH's sales in 2011, and COSH is stepping up its initiatives in these regions. Besides the expansion activities in Asia mentioned above, COSH is also setting up a new manufacturing facility near Sao Paulo, Brazil to support customers such as Honda and Toyota.
Valuation and Financial Analysis
COSH is currently trading at a trailing twelve months P/E of 6.44 and a trailing twelve months EV/EBITDA of 4.02. COSH achieved a ROE of 15.8% for the past twelve months.
COSH has emerged strongly from Chapter 11, with gross margins and operating margins for fiscal 2011 back to its 2005 levels, at 15% and 4% respectively. COSH's balance sheet is much stronger this time round, with $482 million of debt against $217 million of cash. It sports a healthy net leverage ratio of 0.9 and an interest coverage ratio of 6.8, with no major debt maturity until 2018.
On November 9, 2012, COSH's Board of Directors approved a securities repurchase program authorizing COSH to repurchase, in the aggregate, up to $25 million of its outstanding common stock, 7% cumulative participating convertible preferred stock or warrants to purchase common stock. The Board's authorization terminates on February 14, 2013.
COSH is highly dependent on the automotive industry, the major global OEMs and consumer vehicle demand. It has not completely weaned off its reliance on the U.S. market, with about half of its 2011 revenues derived from General Motors (GM), Ford (F), and Chrysler.
Approximately 33% of COSH's employees were represented by unions, with 10% of the unionized employees located in the United States. In April 2012, 65% of unionized workers at COSH's plant in Mitchell, Canada voted in favor of a 10% wage cut, as a concession for COSH not relocating its plant to the United States. Unionization activities could potentially result in work stoppages and/or increased costs for COSH.
COSH's pension plans are currently underfunded. As of December 31, 2011, its projected benefit obligations for U.S. pension benefit obligations and international employees benefit obligations exceeded plan assets by $94.2 million and $100.1 million respectively. COSH's estimated funding requirement for its pension plans during 2012 is approximately $22.3 million, which is still manageable compared with its 2011 revenues of $2.85 billion.