Are rubber tires here to stay? Today as well as in the past rubber is critical to U.S. and global transportation. But are rubber company stocks good investments? In this post, we’ll examine arguments both for and against rubber companies.
Despite increased focus on renewable energy, rubber’s everyday transportation role persists. Moreover, even alternative means of transit like bicycles and scooters (popular in developing economies with growing populations) require rubber. Therefore, its market is resilient even amid a global recession.
The first tire company we’ll take a look at is The Goodyear Tire & Rubber Company (NASDAQ:GT). In brief, its margins are anemic and revenue growth non-existent. Additionally, having a solid dividend is critical to establishing passive income–which The Goodyear Tire & Rubber Company (NASDAQ:GT) lacks.
Now, let’s look at its books. Total assets to total liabilities for 2012 are about 1:1. This area needs improvement in order to adequately provide a margin of safety or when a stock is bought well below its intrinsic value. Yet despite The Goodyear Tire & Rubber Company (NASDAQ:GT)’s established and profitable brand, its metrics are less than stellar. However, its overall fundamentals are telling.
As a mature company and industry leader, The Goodyear Tire & Rubber Company (NASDAQ:GT)’s lack of product innovation is troubling. In this way, large industry leaders often become market laggards, as exemplified by companies such as Microsoft and IBM. Therefore, The Goodyear Tire & Rubber Company (NASDAQ:GT)’s growth prospects can arguably only diminish over time. For these reasons, as well as the above-mentioned stock characteristics, I think I’ll pass.
Next, we’ll examine Cooper Tire & Rubber Co (NYSE:CTB). My first observation is that the stock’s dividend and direct stock purchase plan (DSPP). This bodes well for long-term investors as it significantly reduces investment expenses by avoiding (expensive) commissions. DSPP’s also encourage long-term holding via dividend reinvestment and dollar cost averaging. Also, its margins are a little chunkier than The Goodyear Tire & Rubber Company (NASDAQ:GT)’s, weighing in at 6.25%, which clearly beats its competitors. Furthermore, earnings growth is outstanding.
Another appealing aspect of the company is its North American tire operations. This corporate division has diverse product offerings for cars, light and medium trucks, racing, and motorcycles. These products are sold to tire dealers, wholesale distributors, and retail tire / automotive chains. So given its level of product diversification and differentiation, Cooper Tire & Rubber Co (NYSE:CTB) beats Goodyear hands down.
Finally, we’ll take a look at Titan International Inc (NYSE:TWI). First things first: The dividend, listing in at 0.1%, is completely unsatisfactory. Also, a beta of 3.18 indicates a volatile stock (the S&P’s beta is 1, therefore Titan International Inc (NYSE:TWI)’s 3.2 beta is over triple the market) that will give moderate-risk investors heart palpitations. Lastly, profit margins weighing in at 4.1% underwhelm.
Additionally, Titan International Inc (NYSE:TWI)’s balance sheet clearly needs some work; it has almost twice as much debt as cash. However, one positive aspect of Titan International Inc (NYSE:TWI) is that it markets its products to off-highway vehicles used in the agricultural, construction, and consumer markets, both domestically and abroad. This unique aspect firmly establishes Titan International Inc (NYSE:TWI) as niche market player within the tire sub-sector, and establishes a competitive advantage over its rivals. Yet despite these advantages, Titan International Inc (NYSE:TWI) doesn’t fit my criteria for a “buy and hold” stock due to its aggressive growth strategy, which is arguably more risky than a blue chip.
Best of Breed
Based upon my (above-mentioned) analysis and its superior yield / growth opportunities, my pick is Cooper Tire & Rubber Co (NYSE:CTB). IIf investors are looking for potential upside and want to collect a decent, but not outstanding, dividend, they should further investigate whether Cooper Tire & Rubber Co (NYSE:CTB) fits their investment criteria. Having said that, as with any stock, be sure to do your due diligence prior, during, and after investment.
The Bottom Line
Although rubber tires are an essential good in the global economy given razor thin margins and many superior stocks in the market I wouldn’t invest in any tire company. And although this post is meant to provide a broad overview of relevant tire companies wise investors should as Peter Lynch advised: “invest in what [they] know.” Therefore, if tire stocks are largely outside an investor’s area of expertise the likelihood of making a poor investment decision and avoidable mistakes is higher than it otherwise would be and there a plethora of more profitable investment alternatives. But if you’re further inclined to invest in tires companies do the research. Otherwise it may be time to “burn rubber.”
The article Tire Companies: When the Rubber Hits the Road originally appeared on Fool.com and is written by David Mercer.
David Mercer has no position in any stocks mentioned. The Motley Fool owns shares of Titan International.
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