January has mostly been a good month so far in the stock market; since bottoming near bear market territory just before Christmas, the S&P 500 is up a little over 6%. The rally has been broad-based enough that a variety of industries have followed the index higher. That rally includes stocks that fit into the Consumer Discretionary sector. This is a sector that covers a number of industries, including cyclicals like autos, auto parts and tires.
Rubber tires are an interesting segment of the market; as much as anything else, it is marked by the fact that in the U.S., there are only two publicly traded rubber tire companies. This is an industry whose largest companies are spread across the world, and that includes Goodyear Tire & Rubber Company (GT). The other U.S.-based company, Cooper Tire & Rubber Co. (CTB) is the subject of my spotlight today. A much smaller player in the market, CTB has nonetheless been in business for more than a century. It has also followed the broad market higher over the last month, rallying almost 7.5% in that period, while GT has merely managed to tread water.
CTB bucked the broader market’s trend at the end of the year; while the S&P 500 extended itself into bear market territory into the end of the year, CTB found its trend bottom in late October, and has rallied more than 40% from that point. Does that mean the stock’s upward move is done, or will it continue to lead the market higher? The company has some interesting fundamental strengths working in its favor, and others that are less than desirable. Relative to some of my favorite valuation measurements, it may be tempting to bet on even more upside. Let’s look at the numbers and let you decide if the stock represents an opportunity, or a risk.
Fundamental and Value Profile
Cooper Tire & Rubber Company is a manufacturer and marketer of replacement tires. The Company specializes in the design, manufacture, marketing and sales of passenger car, light truck, medium truck, motorcycle, and racing tires. The Company operates through four segments: North America, Latin America, Europe, and Asia. The North America segment comprises its operations in the United States and Canada. The Americas Tire Operations segment manufactures and markets passenger car and light truck tires, for sale in the United States replacement markets. The Latin America segment comprises its operations in Mexico, Central America, and South America. The European segment has operations in the United Kingdom and the Republic of Serbia. Its the United Kingdom entity manufactures and markets passenger car, light truck, motorcycle and racing tires and tire retread material. As of December 31, 2016, the Company operated nine manufacturing facilities and 20 distribution centers in 10 countries. CTB’s current market cap is $1.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined a little over -9%, while revenues were mostly flat but posted a positive increase of .5%. The picture is much better in the last quarter, as earnings increased more than 250%, while sales increased more than 5.5%. The company’s margin profile over the last twelve months has been incredibly narrow, at only 1.24%, but improved significantly in the last quarter to 7.28%.
Free Cash Flow: CTB’s free cash flow is minimal, at a mere $27 million. That translates to a low Free Cash Flow Yield of 1.57%.
Debt to Equity: CTB has a debt/equity ratio of .24. This is a very conservative number. The company’s balance sheet demonstrates very healthy liquidity and effective debt management, as cash and liquid assets in the last quarter were almost $209 million while long-term debt was almost $295 million.
Dividend: CTB pays an annual dividend of $.42 per share, which translates to a dividend yield of about 1.24% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for CTB is $24.53 per share. That number also translates to a Price/Book ratio of 1.37 at the stock’s current price. Their historical average Price/Book ratio is 1.88. That suggests the stock is trading right now at a discount of a little more than 36%. It is also trading almost 40% below its historical Price/Cash Flow ratio, which translates to a long-term target price between $46 and $48 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: CTB’s price pattern since spring of last year separates it from the rest of the market, and actually marks an intermediate upward trend. The stock is currently pushing very near to resistance at around $34.50 per share, with its closest support at about $30.50. That range marks a consolidation pattern that puts the stock at something of a crossroads; a break above resistance would provide confirmation of the upward trend, while a break below support would signal a trend reversal that could see the stock retest its 52-week lows between $22.50 and $23 per share.
Near-term Keys: The stock’s narrow margin profile, along with poor Free Cash Flow performance act as counters for me to the stock’s interesting valuation numbers. While the broad market has been rallying this month, I think the conditions remain uncertain enough, with plenty warning signs about global economic weakness, that make taking a long-term position in a stock with mixed fundamental strength. There could be some interesting short-term trade opportunities depending on what the stock does in the immediate future. A break above resistance is a good signal to buy the stock or start working with call options with a near-term target price between $38.50 and $40, while a break below support at $30.50 should be taken as a signal to short the stock or to buy put options with a bearish target price between $26 and $25 per share.