The Very Timely Profit Power of Selected Value Stocks
October 12, 2012 - Value Investing Stock Pick - Cooper Tire & Rubber Co by Zacks Investment Research
Cooper Tire & Rubber Co. (CTB - Analyst Report) is a replacement tire maker that became a Zacks #1 Rank (Strong Buy) on October 10. There is currently a rumor that the company is in the process of being acquired, but earnings estimates have been trending higher for several months. With a price-to-sales (P/S) ratio of just 0.3, this stock is a true value pick.
Robust Growth in Second Quarter
On August 9, Cooper Tire & Rubber reported a more than four-fold increase in profits to $51.7 million for the second quarter, compared to $11.5 million a year ago. This was the company's 12th straight quarter of profitability. Earnings per share of 82 cents surpassed the Zacks Consensus Estimate by 64%.
The improvement in profits was mainly due to lower raw material costs. Other factors helping bottom line growth included higher sales volumes, improved manufacturing efficiencies and lower product liability costs.
Revenues increased 15% to $1.1 billion, driven by higher sales volumes in the North American and International operations. Sales in its North American Tire division grew 16% while that in the International Tire unit went up 6%.
Cooper Tire & Rubber believes product innovations, cost reduction measures, falling raw material costs and profitable investments will boost its earnings, despite the headwinds in the tire industry.
The company will report its third-quarter results on November 2. The Zacks Consensus Estimate is currently at 87 cents per share, or about 11.5% higher than 3 months ago.
Earnings Momentum Advancing
The Zacks Consensus Estimate for 2012 is up nearly 14% in the past three months to $2.56 per share, including a rise of 1.6% in the past 7 days. As for 2013, the Zacks Consensus Estimate of $2.99 is up almost 13% in 90 days and 4.5% in the past week. The estimates for 2012 and 2013 reflect year-over-year growth of 113.5% and 16.6%, respectively.
Attractive Value
Shares of Cooper Tire & Rubber have been rising since October last year. It reached a 52-week high of $23.40 on September 14, 2012. The expanding gaps between the 2011, 2012, 2013 and 2014 estimate lines should entice investors.
In addition, Cooper Tire & Rubber has strong value characteristics. Apart from a low P/S, it is currently trading at a forward P/E multiple of 7.3 and a P/B multiple of 1.5. (A P/S ratio lower than 1.0, a P/E below 15.0 and a P/B ratio under 3.0 generally indicate value.) Moreover, the company has a 1-year ROE of 18.2%, which is in line with the peer group average. It also has a PEG ratio of 0.96, which is less than one and indicates that the stock is reasonably valued given the expected growth.
Founded in 1913, Cooper Tire & Rubber Co. manufactures tires and related products for passenger vehicles and light trucks. The $1.2 billion company has more than 60 manufacturing, sales, distribution, technical and design facilities located in 10 countries across the globe. It is the ninth largest tire company in the world and the fourth largest in the U.S.
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What Is Value Investing?
Value investing is the selection of stocks that are priced less than their intrinsic values. Value investors are looking for stocks of companies that they think the market has undervalued. Markets overreact to good and bad news especailly in uncertain times resulting in stock price movements that do not aligned with the company's long-term fundamentals. The result is an opportunity for value investors to profit by investing when the prices are deflated. Mostly value investors use lower than average price-to-book or price-to-earnings ratios, and/or high dividend yields to purchase stocks.
Dividend Paying Stocks Generate Real Cash and Build Wealth
Intrinsic Value
Forecasting intrinsic value is very subjective. Finding and defining intrinsic value is not the same for everyone. Buy buying hopefully at low enough prices, in case the price goes lower, it won't be as severe to allow you to hold short-term to gain the long-term return.
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Value Investing and the Difference Between Big and Small Investors
Millionaire and billionaire investors have the ability to ride out longer and deeper downtrends or bear markets in asset prices where as small investors and traders cannot so easily without losing their entire account equity. If your not one of these types of investors traders, then you should be highly considering and using stop-loss to cut your losses when they are still small and preserve your investing trading capital. Your stop-loss will depend upon how much money you can afford to lose, leverage, and other factors. Allowing for a stop-loss of 8% average for DJIA and S&P500 stocks to 15% to 20% for Nasdaq and penny stocks is maximum suggested amounts to accept.