Rating Update: Stock Rating B-Positive (1/23/20)-Cooper Tire & Rubber Co (CTB).

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BUSINESS

Cooper Tire & Rubber Company, together with its subsidiaries, designs, manufactures, and markets replacement tires in North America, Latin America, Europe, and Asia. The company operates through Americas Tire Operations and International Tire Operations segments. It manufactures and markets passenger car, light truck, motorcycle, and racing tires, as well as tire retread material; and distributes tires for racing, medium trucks, and motorcycles. The company sells its products to independent tire dealers, wholesale distributors, regional and national retail tire chains, and other tire and automotive product retail chains, as well as original equipment manufacturers; and directly to end users through three owned retail stores. Cooper Tire & Rubber Company was founded in 1913 and is headquartered in Findlay, Ohio.
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INVESTMENT RATING

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CTB is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.

Cooper Tire & Rubber has a current Value Trend Rating of B (Positive).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing very contradictory signals. Cooper Tire & Rubber has a very high Appreciation Score of 93 but a slightly negative Power Rating of 37, producing the Positive Value Trend Rating.

Cooper Tire & Rubber’s stock is selling well below targeted value. The current stock price of $28.53 compares to targeted value 12 months forward of $89.
Cooper Tire & Rubber’s very high appreciation potential results in an appreciation score of 93 (only 7% of the universe has greater appreciation potential.)
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Cooper Tire & Rubber has a Power Rating of 37. (This slightly negative Power Rating indicates that CTB’s chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly negative Power Rating include: is in an extremely unfavorable position current; and recent price action has been neutral. An offsetting factor is the recent trend in CTB’s earnings estimates has been favorable.

INVESTMENT PROFILE

CTB’s financial strength is average. Financial strength rating is 48.
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Relative to the S&P 500 Composite, Cooper Tire & Rubber Co has significant Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that CTB is normal risk. Relative weaknesses include: low forecasted profitability, low financial strength, low expected growth, low historical growth, and high earnings variability. CTB’s valuation is low: moderate dividend yield, low P/E ratio, and low price/book ratio. CTB has unusually low market capitalization.

CURRENT SIGNALS

Cooper Tire & Rubber’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; and falling leverage.

Cooper Tire & Rubber’s current technical position is mixed. The stock price is in a 2.3 month up move. The stock has appreciated 25.5% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average. The stock has just risen above its 200 day moving average.

ALERTS

Important positive changes in Cooper Tire & Rubber Co (NYSE: CTB) investment behavior have recently occurred: the stock’s recent price rise disrupted its longer term downtrend.
The stock is currently rated B.
Cooper Tire & Rubber Co (NYSE: CTB) stock closed at $1.33 on 1/23/20 after a major increase of 11.2%. Moreover, this advance was accompanied by above average trading volume at 135% of normal. The stock has performed in line with the market over the last nine months and has risen 3.2% during the last week.

CASH FLOW

In 2018, Cooper Tire & Rubber experienced no change in cash of +$4.5 million (+1%). Sources of cash balanced uses. Cash generated from 2018 EBITDA totalled +$340.5 million. Non-operating uses consumed -$48.4 million (-14% of EBITDA). Cash taxes consumed -$33.5 million (-10% of EBITDA). Re-investment in the business amounted to -$162.1 million (-48% of EBITDA). On a net basis, debt investors withdrew -$60.4 million (-18% of EBITDA) while equity investors pulled out -$31.6 million (-9% of EBITDA).
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CTB’s Non-operating Income, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Cooper Tire & Rubber Co Peer Group. In most years, Cooper Tire & Rubber was in the third quartile and top quartile. Currently, Cooper Tire & Rubber is slightly below median at -14% of EBITDA (-$48.4 million).

CTB’s Cash Taxes, %EBITDA experienced a very strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Cooper Tire & Rubber Co Peer Group. In most years, Cooper Tire & Rubber was in the top quartile and third quartile. Currently, Cooper Tire & Rubber is slightly above median at -10% of EBITDA (-$33.5 million).

CTB’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Cooper Tire & Rubber Co Peer Group. In most years, Cooper Tire & Rubber was in the third quartile and top quartile. Currently, Cooper Tire & Rubber is substantially above median at -48% of EBITDA (-$162.1 million).

CTB’s Debt Investors, %EBITDA has experienced a strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Cooper Tire & Rubber Co Peer Group. (Since 2016 Debt Investors, %EBITDA has experienced a very sharp decline.) In most years, Cooper Tire & Rubber was in the third quartile and second quartile. Currently, Cooper Tire & Rubber is lower quartile at -18% of EBITDA (-$60.4 million).

CTB’s Equity Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Cooper Tire & Rubber Co Peer Group. (Since 2016 Equity Investors, %EBITDA has experienced a very sharp recovery.) In most years, Cooper Tire & Rubber was in the second quartile and lower quartile. Currently, Cooper Tire & Rubber is above median at -9% of EBITDA (-$31.6 million).

CTB’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Cooper Tire & Rubber Co Peer Group. In most years, Cooper Tire & Rubber was in the second quartile and lower quartile. Currently, Cooper Tire & Rubber is slightly above median at +1% of EBITDA (+$4.5 million).
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CTB’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Cooper Tire & Rubber Co Peer Group. In most years, Cooper Tire & Rubber was in the second quartile. Currently, Cooper Tire & Rubber is at median at +13%.

PROFITABILITY

CTB’s return on equity reached a new post-2009 low in 2019.
The key to the story for CTB is a strong negative trend in pretax operating return significantly augmented by a very strong negative trend in non-operating factors.
The productivity of CTB’s assets declined over the full period 2009-2019: asset turnover has suffered a strong overall downtrend.
Partially offsetting this trend, however, pretax margin has exhibited a volatile overall uptrend even as it experienced a very sharp decline after the 2016 high.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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CTB’s return on equity is substantially below median (3.7%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is substantially below median (2.9%) reflecting asset turnover that is at median (1.03X) and substantially below median pretax margin (2.8%).
Tax “keep” rate (income tax management) is lower quartile (57.8%) resulting in after tax return on assets that is at the lower quartile.
Financial leverage (leverage) is above median (2.23X).

GROWTH RATES

Overall, Cooper Tire & Rubber’s growth rate has slowed considerably in recent years.
Cooper Tire & Rubber’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 0.3% per year.

Total asset growth has been 4.2% per year.

Annual E.P.S. growth has been -1.8% per year. (More recently it has been -28.8%.)

Equity growth has been 15.4% per year. (More recently it has been 9.3%.)
No consensus growth rate forecast is available for Cooper Tire & Rubber.
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Relative to the Cooper Tire & Rubber Co Peer Group, Cooper Tire & Rubber’s historical growth measures are generally third quartile. Equity growth (15.4%) has been upper quartile. Total asset growth (4.2%) has been below median. E.P.S. growth (-1.8%) has been slightly below median. Revenue growth (0.3%) has been at the lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Cooper Tire & Rubber’s stock price performance has been volatile and superior. Between March, 2009 and January, 2020, Cooper Tire & Rubber’s stock price rose +606%; relative to the market, this was a +69% gain. Significant price moves during the period: 1) September, 2011 – July, 2013: +208%; 2) April, 2011 – September, 2011: -60%; and 3) March, 2009 – July, 2010: +435%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -9.7% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through December, 2019 of -9.7% is lower quartile relative to Cooper Tire & Rubber Co Peer Group.

Current 5-year total return performance of -2.4% is lower quartile relative to the S&P 500 Composite.
Through December, 2019, with lower quartile current 5-year total return of -2.4% relative to S&P 500 Composite, Cooper Tire & Rubber’s total return performance is substantially below median relative to Cooper Tire & Rubber Co Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, CTB’s overall valuation is quite low. Four of five factors are upper quartile. The highest factor is the price/earnings ratio, followed by the ratio of enterprise value/earnings before interest and taxes, then by the ratio of enterprise value/assets, then by the price/equity ratio. The lowest factor, ratio of enterprise value/revenue, is lower quartile.

Relative to Cooper Tire & Rubber Co Peer Group, CTB’s overall valuation is low. The highest factor, the price/earnings ratio, is at the upper quartile. Price/equity ratio is below median. Ratio of enterprise value/assets is lower quartile. Ratio of enterprise value/revenue is at the lower quartile. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is lower quartile.
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Cooper Tire & Rubber has a major value gap compared to the median. For CTB to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.61X to 0.88X. If CTB’s ratio of enterprise value/revenue were to rise to 0.88X, its stock price would be higher by $15 to $44.
For CTB to achieve upper quartile valuation relative to the Cooper Tire & Rubber Co Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 0.61X to 1.60X. If CTB’s ratio of enterprise value/revenue were to rise to 1.60X, its stock price would increase by $55 from the current level of $29.

VALUE TARGETS

CTB is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Cooper Tire & Rubber’s current Price Target of $88 represents a +209% change from the current price of $28.53.
This very high appreciation potential results in an appreciation score of 93 (only 7% of the universe has greater appreciation potential.)
Notwithstanding this high Appreciation Score of 93, the moderately low Power Rating of 37 results in an Value Trend Rating of B.
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Cooper Tire & Rubber’s current Price Target is $88 (+77% from the 2018 Target of $50 and +209% from the 01/23/20 price of $28.53). This dramatic rise in the Target is the result of a +6% increase in the equity base and a +67% increase in the price/equity multiple. One Driver has a positive impact on the price/equity multiple, one has a negative impact, and one has no effect. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple. The forecasted flat growth has no impact. The forecasted increase in cost of equity has a slight negative impact.
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PTR’s return on equity forecast is 16.2% — above our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2010 and 2018. The current forecast is significantly below the 2010 peak of 30%.

PTR’s growth forecast is 6.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is well below the 2012 peak of 13%.

PTR’s cost of equity forecast is 7.4% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, variable decline between 2010 and 2018. The current forecast is below the 2010 peak of 11.8%.
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At Cooper Tire & Rubber’s current price of $28.53, investors are placing a negative value of $-9 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 6.0% per year, and a return on equity of 10.7% versus a cost of equity of 7.1%.
PTR’s 2020 Price Target of $88 is based on these forecasts and reflects an estimated value of existing assets of $38 and a value of future investments of $50.

About John Lafferty 61383 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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