As a global company, with operations in 11 countries, Cooper Tire & Rubber Company (CTB) designs, manufactures markets and sells passenger car, light truck, medium truck, racing and motorcycle tires through a number of subsidiaries, affiliates and joint ventures worldwide.
Cooper Tire & Rubber is primarily focused on manufacturing tires for the replacement tire market. Worldwide, Cooper Tire & Rubber is one of the top ten tire manufacturers globally, with revenues for the twelve month period ended June 30th of $4.15 billion.
Cooper Tire & Rubber has a significant position in the United States tire market, currently the world's largest, and an emerging base of operations in China, the fastest growing major tire market in the world. North American sales account for approximately 70 percent of its revenues, with international revenues comprising the balance.
Recent news that U.S. auto sales for August totaled 1.19 million cars, trucks and sport utility vehicles, a 13% increase from August of 2011, and the highest sales rate in four years, is significant for the U.S. tire industry. It's definitely beneficial for Cooper Tire & Rubber, as the fourth largest tire manufacturer in North America.
From a longer term perspective, China, the world's largest auto market is of greater importance to Cooper Tire & Rubber than the North American market. As one of the top eight truck and bus radial tire manufacturers in China the company is well positioned to take advantage of the country's future growth. The China Passenger Car Association has indicated that 18.5 million vehicles were sold in China in 2011, and has projected sales of 20 million vehicles for this year. Confirming the size and importance of the China auto market, General Motors' (GM) Chief Executive, Dan Akerson, has stated that China's auto market will reach 30 million annual vehicle sales by the year 2020.
Recent Financial Results
Cooper Tire & Rubber's reported net sales of flat for the second quarter of this year, an increase of $140 million, or 15 percent, compared with the second quarter of 2011. Operating profit was $95 million for the quarter, an increase of $71 million from the operating profit from the same quarter of last year. The company's net income was $52 million, or $0.82 per share, for the quarter ended June 30th of this year, compared with $12 million, or $0.18, for the second quarter of 2011, an increase of over 330%. The financial results for the quarter included a pre-tax gain of $7 million related to termination of a pension plan in the United Kingdom.
Of special note to investors, the company has paid dividends every quarter for 40 years. With an annual rate at $.42 per share, it represents a yield of approximately 2.1%.
At the end of June, Cooper Tire & Rubber had cash and cash equivalents of $241 million, an increase of $103 million compared with the ending balance for the second quarter of 2011, which $138 million. The increase in the company's cash position was a result of an increase in profits as well as reduced inventory levels.
Summary of North American Operations
Cooper Tire & Rubber's revenues from North American operations in the second quarter of this year were $771 million, which was an increase of 16% from the revenues of $663 million for the same quarter of 2011. North American unit sales for the quarter increased 15%, compared to the second quarter of last year. The company's North American tire shipments increased 16% in the quarter, compared to overall flat industry shipments reported by the Rubber Manufacturers Association.
Summary of International Operations
Cooper Tire & Rubber non-North American operations resulted in sales of $419 million for the second quarter of this year, an increase of $23 million or 6 percent compared with the same quarter of last year. Unit shipments internationally increased 19 percent, over the number of units during the second quarter of last year. This increase in international volumes reflects an increase from shipments in Asia of 16 percent, and a minimal increase from shipments in Europe of 1 percent.
The Company's China Strategy and Operations
Cooper Tire & Rubber's China strategy dates back to 2006 when it entered the market. The company has two joint ventures with tire manufacturing facilities in Rongcheng City and Kunshan.
While the company's global strategy has always been focused on the replacement tire market, the company's China strategy has included supplying tires to Chinese automakers. The company's objective in selling to China's automakers is part of its strategy to build its brand within China. With the China market consisting of many first-time auto buyers, the company believes that this strategy will result in tire buyers being aware of its brand, and when the time comes for them to purchase replacement tires, hopefully purchasing the company's tires.
Phil Caris, vice president of sales and marketing at Cooper Tire & Rubber has supplying that the company, while manufacturing 78 percent of its tires in the U.S. sees its short-term growth as being about China. In a report published by Miller Walk, Caris stated, "We have no plans to be a major player in the European market. Our expansion will be in the U.S. and Asia." Caris was also quoted as saying:
The Chinese consumer is very brand conscious, and we have a lot of brand building to do. We don't expect customers to just come into the small, independent tire stores that dominate the Chinese market and ask for Cooper Tires.
The tariff on imports to the United States of Chinese manufactured light vehicle tires expired on September 26th. The tariff was implemented in 2009, and was initially 35 percent, but was lowered by 5 percentage points per year, and most recently was at 25 percent. While Cooper Tire & Rubber is well positioned to take advantage of exporting tires from China to the U.S., the company has indicated that the advantages of manufacturing in China have diminished due to increased freight and utility costs as well as increased labor costs.
As a confirmation of the benefits to China's tire industry from resumptions of exports to the U.S., the privately-held Chinese tire manufacturer, Hangzhou Zhongce, indicated that the end of the tariffs could result in tire exports to the U.S. recovering to about 70 percent of the pre-tariff sales level of 2008.
Li Zhongxing, vice general manager at Qingdao Segrift International Logistics Co. , a unit of Shanghai listed Sailun Co. (601058) was quoted by Bloomberg as saying that the end of tariffs is expired" for China's tire industry. He also indicated that most passenger car tire manufacturing facilities in China are already running at full capacity due to local demand and that there was a limitation on their ability to increase production for exports.
Although economic growth is minimal in the United States and negative in the Eurozone, the overall global auto market is continuing to grow, which creates a demand for replacement tires. Cooper Tire & Rubber's core operations in the U.S., as well as its foothold in China are significant, as they are both growing markets for replacement tires.
While the company's significant growth in revenues and net income in the second quarter of this year may not be sustainable at the same rate, the third and fourth quarter results for this year will likely mirror those of the second quarter.
What should be significant for investors is not only the company's solid base of North American operations, but more importantly the company's positioning "where they need to be," specifically China. This China presence, coupled with the company's long history as a dividend paying company, makes Cooper Tire & Rubber worthy of consideration as a long-term growth opportunity.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CTB over the next 72 hours.