We came across a bullish thesis on Cooper-Standard Holdings Inc. (CPS) on Framp Files’ Substack by Stephen Frampton. In this article we will summarize the bulls’ thesis on CPS. Cooper-Standard Holdings Inc. (CPS) share was trading at $13.63 as of Sept 17th.
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Cooper-Standard, an automotive component supplier to major OEMs like GM, Ford, and Stellantis, offers a compelling investment opportunity. The core thesis is based on pent-up demand for vehicles and the company’s substantial operating leverage, which could drive significant upside as long as it avoids bankruptcy. The stock price remains depressed, but recent developments suggest a turnaround may be underway.
Moody’s, which no longer views Cooper-Standard as at risk of imminent default, supports this optimism. The credit agency highlights several positive trends, including improving earnings, better pricing from suppliers and customers, cost reductions, and a focus on higher-margin new product platforms. Although leverage remains high and production volumes are likely to soften, Cooper-Standard’s liquidity is sufficient, and it is on track to be free cash flow positive by 2025. This is a crucial milestone in the company’s recovery, bolstered by its position as a supplier of competitive products to popular vehicles.
Cooper-Standard’s Q2 earnings, while underwhelming at first glance, reveal encouraging signs upon closer inspection. Sales fell due to the divestiture of a rubber business, but excluding this, sales were up 1% despite a broader industry decline. This indicates the company is gaining market share. Margins improved, with gross profit and EBITDA margins both increasing, demonstrating that cost-saving measures are working. Free cash flow remains negative, but management’s decision to pay down $25M in debt suggests confidence in the turnaround.
Despite a minor revision in guidance due to macroeconomic headwinds, such as softening production volumes and a weakening USD, Cooper-Standard is targeting 10% EBITDA margins by 2025. If production volumes rebound, the company could generate $270M in EBITDA, positioning it as a very different company by then. Factors such as dealer incentives and falling vehicle prices suggest that demand could pick up, with lower prices likely to make vehicles more attractive to consumers. However, high financing costs remain a challenge, though the potential for interest rate cuts may alleviate this issue.
In summary, Cooper-Standard’s success hinges on avoiding bankruptcy, improving operating leverage, and a rebound in auto production volumes. With the company’s debt rating upgraded, margins improving, and favorable long-term trends in the auto market, the stock presents a promising investment, albeit with some macroeconomic risks.
Cooper-Standard Holdings Inc. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 9 hedge fund portfolios held CPS at the end of the second quarter which was 9 in the previous quarter. While we acknowledge the risk and potential of CPS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CPS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.