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Cooper Tire Lays Some Rubber
Following the disappointing third-quarter results released by rivals Goodyear (NYSE:GT) and Titan International (NYSE:TWI), shareholders of tire maker Cooper Tire (NYSE:CTB) were likely braced to receive their full measure of pain when the company reported its quarterly results the following week. But, to everyone's surprise, the company reported earnings that handily beat Wall Street's expectations and shareholders were rewarded with a more than 5% pick-up in share value. Earnings per share, excluding restructuring costs, came in at 99 cents vs. analysts expectations of 62 cents.
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Operating Efficiencies Boost Profitability
Tire makers continue to face tough times as the depressed state of the U.S. auto market not only dampens demand for cars but tires as well. Cooper's outperformance reveals how the company's earlier moves to shift its production to China are now paying off in terms of greater operating efficiencies and lower production costs.
Back in 2006, Cooper increased its manufacturing footprint in China with two major acquisitions. In September, it ceased production at a major U.S. plant in Georgia for which it expects to incur total restructuring costs of between $120 and $145 million of which about 60 to 70% will be non-cash. A 22 cent per share charge related to this closure appeared in the latest quarterly results.
Taking a bit of short-term pain for long-term gain to restructure in manufacturing makes perfect sense for Cooper. Not only does it enhance the company's competitive position in the tight North American market, but it helps position it to capitalize on the growth in emerging markets. Cooper currently gets about one-third of its sales from outside North America. While overall international sales were up only 4% due to weak European demand, unit sales in Asia rose a blistering 28%.
China Now World's Largest Auto Market
No doubt a lot of this gain is due to China, which now boasts the world's largest and fastest growing car market. For the first nine months of this year, auto sales in China rose 34% to 9.7 million, while U.S. sales over the same period fell 27% to 7.8 million.
Ford (NYSE:F), which also saw its shares soar following the release of its own surprisingly positive earnings results, has also been benefitting from Chinese appetite for cars. Its Chinese sales jumped 32% from a year earlier, and it now plans to build a $490 million plant in China to tap this growing demand.
U.S. Tire Tariff Will Bite
However, with respect to its U.S. sales, Cooper will be obliged to pay a penalty for having shifted so much of its production to China. In September, the U.S. slapped a 35% tariff on Chinese manufactured tires entering the U.S. market in an effort to protect U.S. jobs. That's likely to blunt any profit gains from an expected rebound in U.S. tire sales in 2010. (Learn about the effects of tariffs on the economy in The Basics Of Tariffs And Trade Barriers.)
The Bottom Line
Cooper's outperformance relative to its rivals is no accident, but the result of a well-executed strategy of cost containment that's also likely to further boost sales in the newly emerging Chinese auto market.
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IN PICTURES: Digging Out Of Debt In 8 Steps
Operating Efficiencies Boost Profitability
Tire makers continue to face tough times as the depressed state of the U.S. auto market not only dampens demand for cars but tires as well. Cooper's outperformance reveals how the company's earlier moves to shift its production to China are now paying off in terms of greater operating efficiencies and lower production costs.
Back in 2006, Cooper increased its manufacturing footprint in China with two major acquisitions. In September, it ceased production at a major U.S. plant in Georgia for which it expects to incur total restructuring costs of between $120 and $145 million of which about 60 to 70% will be non-cash. A 22 cent per share charge related to this closure appeared in the latest quarterly results.
Taking a bit of short-term pain for long-term gain to restructure in manufacturing makes perfect sense for Cooper. Not only does it enhance the company's competitive position in the tight North American market, but it helps position it to capitalize on the growth in emerging markets. Cooper currently gets about one-third of its sales from outside North America. While overall international sales were up only 4% due to weak European demand, unit sales in Asia rose a blistering 28%.
No doubt a lot of this gain is due to China, which now boasts the world's largest and fastest growing car market. For the first nine months of this year, auto sales in China rose 34% to 9.7 million, while U.S. sales over the same period fell 27% to 7.8 million.
Ford (NYSE:F), which also saw its shares soar following the release of its own surprisingly positive earnings results, has also been benefitting from Chinese appetite for cars. Its Chinese sales jumped 32% from a year earlier, and it now plans to build a $490 million plant in China to tap this growing demand.
U.S. Tire Tariff Will Bite
However, with respect to its U.S. sales, Cooper will be obliged to pay a penalty for having shifted so much of its production to China. In September, the U.S. slapped a 35% tariff on Chinese manufactured tires entering the U.S. market in an effort to protect U.S. jobs. That's likely to blunt any profit gains from an expected rebound in U.S. tire sales in 2010. (Learn about the effects of tariffs on the economy in The Basics Of Tariffs And Trade Barriers.)
The Bottom Line
Cooper's outperformance relative to its rivals is no accident, but the result of a well-executed strategy of cost containment that's also likely to further boost sales in the newly emerging Chinese auto market.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Eugene Bukoveczky
Contributor - Investopedia Advisor
Eugene Bukoveczky is a freelance writer for Investopedia.com. He holds a Chartered Financial Analyst (CFA) designation and has broad experience in investment research and portfolio management. He has traveled extensively during his career, working in Toronto, New York, London and Dubai. He graduated from York University School of Business with an MBA.
Eugene Bukoveczky is a freelance writer for Investopedia.com. He holds a Chartered Financial Analyst (CFA) designation and has broad experience in investment research and portfolio management. He has traveled extensively during his career, working in Toronto, New York, London and Dubai. He graduated from York University School of Business with an MBA.
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