With the market up over 100%, high quality companies trading at a significant discount to their value are bit by bit becoming more scarce. The silver lining is that businesses with terrible fundamentals have been given ridiculous valuations by the market, providing us with some nice short opportunities.
The tire industry in particular has substantial valuations for businesses with bad economics.
Each of these companies are overvalued according to a discounted cash flow valuation, using a 15% discount rate. For more details on our valuations, please see the 'Statistics and Calculations' section of our FAQ.
We hope you'll use this list as a starting point for your analysis:
1. Titan International Inc. (NYSE:TWI)
Titan manufactures wheels and tires for consumer, agricultural, and earthmoving/contruction markets. While it has had positive free cash flow for the 7 out of the past 10 years, it is an extremely brittle business. Its profit margins are razor thin, at best. The highest it's been over the past 10 years is 2.35%, often going into the red. In fact, as an average over that same time period, TWI has lost $2.10 out of every $100 of Revenue.
We feel comfortable saying that there is no moat here and therefore the sustainability of the TWI's earnings are questionable at best.
Furthermore, TWI is trading at almost two times its intrinsic value and over three times its book value.
- Growth Price (DCF): $10.40
- Current Price: $28.10
TWI is overvalued by 170.19%
Titan's brittle business and its substantial valuation have combined to give it a very low score on our proprietary grading system, which has been fine-tuned to deliver strong results and provide accurate assessments of the quality of stocks.
TWI's Vuru Grade: 14.92/100
For the full Vuru report, click here.
2. Cooper Tire & Rubber Company (NYSE:CTB)
Cooper manufactures and markets replacement tires. It focuses on selling passenger and light and medium truck replacement tires. Its weaknesses, like TWI, lie in the nature of its industry; it's highly competitive and highly capital intensive.
Over the past 10 years, CTB has only squeezed out a meager $1.58 of profit for every $100 of Revenue, on average. Additionally, it's an extremely capital intensive business. Profits have been eclipsed by Capital Expenditure by 212.27% on average over the past 10 years! This is fairly standard for the tire industry where there are significant raw material input costs for natural and synthetic rubber.
Again, like TWI, CTB's razor thin margins point to a lack of a moat and its capital intensity make it a business with terrible economics.
Therefore, its tough to see why the market has overvalued CTB by 94.58% and its trading at over three and half times book value.
- Growth Price (DCF): $13.12
- Current Price: $25.53
CTB is overvalued by 94.58%
CTB's Vuru Grade: 15.55/100
For the full Vuru Report, click here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.