Declining rubber prices this year have helped consumers of the commodity in a big way. Tire producers such as Cooper Tire & Rubber Company (NYSE:CTB), The Goodyear Tire & Rubber Company (NASDAQ:GT), and Titan International Inc (NYSE:TWI) have benefited from the trend so far, but it remains to be seen if the rally can be sustained.
Earlier this month, Cooper Tire & Rubber Company (NYSE:CTB) reported what could be called a disappointing quarterly report in a certain sense. Owing to poor demand from the auto industry and the soft state of economy, shipments dropped during the quarter. This caused revenues to drop 12.5% to $861.7 million during the quarter.
However, profits still increased as the cost of natural rubber – the biggest cost in producing tires – remained weak during the period. In North America, which accounts for nearly 70% of its business, operating margin stood at 11.9%, up 8.6 percentage points from 3.3% in the same period last year. This helped in offsetting the impact of weaker sales. Similarly, profits jumped to $56.1 million, up from $1.6 million a year ago.
The company expects its raw material costs to drop 1% sequentially in the second quarter. This, coupled with increased demand following a harsh winter, should boost profitability in the coming quarter. The company has reasonable gearing, and major valuation metrics indicate the stock is currently undervalued at $23. Deutsche Bank has a target price of $34 on the stock.
The very same factors have caused a 12% rally in The Goodyear Tire & Rubber Company (NASDAQ:GT) over the last 30 days. The company posted lower revenues but higher profits for the quarter ended March 31. Except in Europe, the company saw its margins improving in every other regional market. The Goodyear Tire & Rubber Company (NASDAQ:GT) is truly a global company with only 44.6% of its first-quarter sales coming from the North American region.
Greater exposure to Europe at the expense of North America is proving to be a combination curtailing the growth in profits, however. Unlike Cooper Tire & Rubber Company (NYSE:CTB), The Goodyear Tire & Rubber Company (NASDAQ:GT) has a high debt capital structure which makes it a somewhat less attractive stock to own. However, a forward price-earnings ratio of 5.9 is reassuring in terms of The Goodyear Tire & Rubber Company (NASDAQ:GT)’s returning to profitability. At the same time, a price-sales ratio of 0.18 indicates that the stock is undervalued.
Crystal gazing beyond rubber
Illinois-based Titan International Inc (NYSE:TWI) is a producer of wheels and tires with a strong focus on agricultural, earth moving, and construction industries. The company is not entirely a play on rubber prices as it supplies its specialty wheel products to original equipment manufacturers apart from selling directly to customers. This makes it a natural beneficiary of the surging demand from construction segment in the United States.
The stock currently trades at a price earnings ratio of 16.2 but the same reduces to 8.7 on a forward basis. It has a PEG ratio of 0.94, while its price-to-sales ratio of 0.65 indicates the stock is undervalued and has room for further growth. However, the problem with the company is its high debt structure, which resulted in lower profits in the most recent quarter despite a 25% jump in revenues to $578.4 million from the same period in 2012.
The Foolish bottom line
Overall, Cooper Tire & Rubber Company (NYSE:CTB) and The Goodyear Tire & Rubber Company (NASDAQ:GT) stand to gain directly from softer prices of natural rubber. Although Indonesia, Thailand, and Malaysia – the three countries which control over 70% of the global natural rubber market – have put a plan in place to reduce supplies and strengthen prices; success of this plan is doubtful as similar plans have failed to yield intended results in the past.
Jacob Wolinsky has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Jacob is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Is There More Steam Left in Rubber Companies? originally appeared on Fool.com is written by Jacob Wolinsky.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
