Cooper Tire & Rubber Company (CTB) describes itself as "a global company with affiliates, subsidiaries and joint ventures that specialize in the design, manufacture, marketing and sales of passenger car and light truck tires. The company also has subsidiaries that specialize in medium truck, motorcycle and racing tires. With headquarters in Findlay, Ohio, Cooper Tire has manufacturing, sales, distribution, technical and design facilities within its family of companies located in 11 countries around the world."
"Cooper is focused on the replacement tire market and is the:
- 4th largest tire manufacturer in North America
- 2nd largest U.S. based tire company
- Top 10 global tire manufacturer with revenues of nearly $4 billion
- In the top eight truck and bus radial tire manufacturers in the People's Republic of China.
Reporting segments include North America Tire (70% or revenues) and International Tire (30% of revenues)."
Revenues have grown from $2,035.6 million in F05 to $4,141.7 million fir the twelve months ending June 2012. Annual growth was consistent through 2008 and 2009 when the effects of the recession were evident. In F09, sales bottomed out at $2,779.0 million and then jumped to $3,361.0 million in F10. Revenues increased to $3,927.2 million in F11.
In 2Q12, revenues were $1,058.5 million compared to $918.7 million in 2Q11 for a 15.2% increase. The TTM total sales of $4,141.8 million compares with the year ago period total of $3,623.0 million for a 14.3% jump in sales.
Analysts are forecasting calendar year 2012 revenues to range from $4,056.85 million to $4,358.82 million. The Average of the estimates is $4,242.33 million. For calendar 2013, the estimates are more spread with a low of $3,986.02 million to a high of $4,765.97 million. These estimates average $4,440.37 million.
Cooper reported earnings of $51.7 million, or $0.82 per share, compared with $11.5 million, or $0.82 per share a year earlier. Net profit for the TTM surged to $299.7 million, or $4.76 per share compared to a year ago when net income was $112.1 million, or $1.78 per share.
Analyst estimates for F12 EPS range from $2.40 per share to $2.65 per share and average $2.52 per share. EPS is expected to be higher in F13 with the range being $2.49 per share to $3.40 per share and averaging $2.96 per share. I note that Cooper has surprised analysts for each of the two past quarters.
The improved earnings are the result of higher sales, manufacturing efficiencies and lower raw material costs off-set by softer pricing, higher pension costs and the start-up costs related to the recently acquired operation in Serbia.
As important as earnings are, companies cannot return them to shareholders or grow the company without cash. Therefore, I like to compare earnings to free cash flow to determine the quality of the reported earnings. Cooper has free cash flow of $151.6 million or $2.43 per share. I estimate that free cash will grow to $2.73 per share in F12.
Margins expanded significantly in 2Q12 when compared to 2Q11. The gross margin in 2Q12 was 15.0% compared to 7.5% in 2Q11; the operating margin in 2Q12 was 9.0% compared to 2.6% and the net margin in 2Q12 was 4.9% compared to 1.3% in 2Q11.
Since 2005, gross margins have ranged from a low of 2.6% in F06 to a high of 12.5% in F10. The gross margin of 11.4% for the trailing twelve months compares favorably with 9.3% reported for F11.
Operating margins have fluctuated from a low of -8.9% in 2008 to a high of 4.8% in 2010. The operating margin for the twelve months ending June 2012 grew to 6.0%. A similar pattern occurs with the net profit margin. The low point was in 2008 when the margin was -8.0% and the high point was when the net margin hit 6.5% in F11. The net margin for the TTM is now at 7.2%.
Cooper has a strong balance sheet. As of 2Q12, the company reports $240.5 million in cash on the books and $247.2 million in long term debt and $125.5 million in short term debt. The long term debt to total capitalization ratio is 33.9% and LTD to equity is 51.4%. By my estimation, Cooper generated $151.6 million in free cash flow over the past twelve months implying they could pay off their entire long term debt from their free cash in less than three years. Another way of looking at Cooper's long term debt is to compare it to the company's working capital. In this case, long term debt is about 50% of Cooper's working capital.
I like to use several metrics of profitability. Return on Equity (ROE) is an earnings based measure that is, as the name indicates, compared with a company's equity. To get a fuller picture of profitability, I also evaluate Return on Invested Capital (ROIC). I also qualify earnings-based returns with Cash Flow Return on Invested Capital (CFROI).
Cooper has a current ROE of 51.7% reflecting the recent surge in earnings. This compares with its five year average of 15.7%. The 12 month ROIC is 25.4% compared to an average of 7.4%. The CFROI is currently 13.56%, in line with the industry median.
The company's capital structure is composed of 59% equity and 41% debt. Enterprise Value is $1,446.1 million. Cooper pays an indicated dividend of $0.42 which represents an earnings payout of 8.7% and a free cash payout of 17.15%. These low payout numbers suggest there is room for the dividend to grow. Cooper has not increased its dividend in years. At the current trading price, the dividend yield is 1.9%.
Cooper could also use their excess free cash to repurchase stock. At this time, I am unaware of any plan to repurchase stock. However, the company does have a stock-based compensation plan that includes options, restricted stock and performance stock units. This stock-based compensation plan has a small dilutive effect.
Valuation, as measured by PE ratio suggests that Cooper is undervalued even when using the forward earnings estimates. Additionally, the PEG ratio based on forward earnings and estimated 3-5 year growth is 1.1X, also suggestive of undervaluation.
With a Price/Sales ratio of 0.33X, the company is trading at a discount to the industry median of 0.48X. On a Price to Book basis, the Cooper is trading in line with the industry median.
I think it is important to determine valuation on the basis of Enterprise Value. The purpose of this exercise is to determine what the firm's value is and not just the equity part. The EV/Free cash flow ratio for Cooper is 9.54X compared to an industry median of -12.5X; EV/Sales is 0.35X compared to the industry median of 0.48X. The EV/EBITDA ratio for Cooper is 6.65X compared to the industry median of 8.5X.
The preponderance of the valuation metrics are highly suggestive that Cooper is undervalued. I note that over the past 52 weeks, the share price has already nearly doubled, there appears to be more room to grow.
Cooper is showing strength in sales, earnings and free cash. The company is capable of increasing its dividend and/or financing organic growth from cash generated internally. It appears to remain undervalued. If Cooper trades up to the industry PSR median of 0.48X, the upside could be another 45% to $32.
Disclosure: I am long CTB.