Cooper Tire & Rubber Company (CTB): This Undervalued Tire Company Is Smoking Estimates

The recovery in the US auto market is a fact, as evidenced by a significant increase in sales. One way to play this recovery is buying stocks of automakers. However, several commentators have pointed to the possibilities inherent in auto parts manufacturers, which often provide strong growth at attractive valuations. This often neglected industry may prove to be an enticing alternative to traditional car manufacturers. One company, Cooper Tire & Rubber Company (NYSE:CTB), has been consistently beating the analyst consensus over the last year, and is still trading at a steep discount to the industry.

Introducing Cooper Tire & Rubber

Cooper Tire & Rubber Company (NYSE:CTB) manufacturers and markets replacement tires for passenger cars, light and medium trucks, motorcycles and racing vehicles. Operating in the US and international markets, the company founded in 1913 has a market cap of $1.54 billion with some 13,500 full-time employees. The stock has a fairly volatile beta of 1.93 and is up over 55% in the last year. It also has a dividend yield of about 1.7%.

Earnings and Competition

Over the last few years, Cooper Tire & Rubber Company (NYSE:CTB) has been doing a good job of growing earnings. The company was hit hard by the crisis in 2008, posting an annual loss of $2.30 per share. This was followed by a strong rebound between 2009 and 2012. In 2012 Cooper earned $3.41 per share, with a number of very large quarterly beats throughout the year. Moreover, the company’s margins have been on the increase, the gross profit margin going from 7.5% in mid-2011 to 18% at the end of 2012.

For Q4 2012, Cooper reported record quarterly and full-year results beating the consensus by about 36%. Record sales of $1.1 billion for the quarter represented a 2% increase year-on-year, whereas the full-year figure of $4.2 billion was up 7% compared to 2011. International operations did better than the North American segment with a 9% increase in sales versus a 5%.

The company’s performance benefited from lower material costs, with the price of rubber still dropping, as well as increased manufacturing efficiencies which bolstered the company’s margins. Looking ahead, the company is cautiously optimistic about 2013 while management expects higher long-term basic material costs. Cooper Tire & Rubber Company (NYSE:CTB) will report Q1 2013 earnings on May 9^th.

Cooper Tire & Rubber Company (NYSE:CTB)’s two major rivals are Bridgestone and The Goodyear Tire & Rubber Company (NASDAQ:GT). Of these two, Bridgestone has been the best performer by far over the last year, its stock rising nearly 60%. The Japanese tire manufacturer has rallied along with the Nikkei, and has no doubt benefited from a weak yen and falling rubber prices. With an increase in operating income of nearly 50% from 2011 and 2012, the company has certainly been growing the bottom line, despite only a small uptick in net sales.

The Goodyear Tire & Rubber Company (NASDAQ:GT) has rallied less than 10% over the last year, despite annual EPS in 2012 beating the consensus by over 15% and quarterly EPS beating significantly in Q1 2013. The company warned however that industrial demand remained weak and cited continuing weakness in the European auto market as a drag on sales. Tire sales volume declined 8% for the quarter, and the company continues to cut costs in Europe to offset the decline. The company did maintain its outlook for the year, expecting an operating profit of between $1.4 billion and $1.5 billion.

Valuations and Metrics

Cooper is currently a bargain compared to its prime competitors and the industry. The stock trades at only 7 times trailing earnings, versus The Goodyear Tire & Rubber Company (NASDAQ:GT)’s 13.8 and Bridgestone’s 13.07. The industry average is around 9.6 times trailing earnings. The company’s price to sales is only 0.37 and the operating margin of 9% is quite a bit higher than the 5% industry average. Cooper has an excellent return on equity of 31.43%, and a manageable debt load at under 41% to total equity.

The Bottom Line

Investors are increasingly turning to alternative ways of playing the auto recovery. The often neglected auto parts manufacturing industry offers good growth, with less risk than the traditional auto industry plays. Cooper Tire & Rubber Company (NYSE:CTB) has been growing its top and bottom line impressively over the last few years, which has been reflected in its excellent stock performance. Despite this rally, the stock is still trading at a bargain.

The article This Undervalued Tire Company Is Smoking Estimates originally appeared on Fool.com and is written by Daniel James.

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