The past year hasn’t been easy for investors in the auto sector, as automakers and auto parts manufacturers both have posted negative double-digit returns.
Still, the weakness in these groups has paled in comparison to the substantial losses in the tire companies. In the 12 months ended Wednesday, Goodyear Tire & Rubber (NYSE:GT) declined 39%, while Cooper Tire & Rubber (NYSE:CTB) fell nearly 38%. Given the massive underperformance for these stocks — the SPDR S&P 500 ETF (NYSE:SPY) gained 1.8% in the same time period — some mean reversion might be in the offing.
The chart below shows the large gap between the Dow Jones U.S. Tires Index (DJUSTR) relative to the Auto Manufacturers Index (DJUSAU) and the Auto Parts Index (DJUSAT).
Goodyear’s shortfall hasn’t escaped the notice of value investors. After the bell Tuesday, a regulatory filing revealed that SAC Capital had acquired over 4.7 million shares in the first quarter, while Wellington Management had boosted its stake from 21.7 million to 24.7 million shares. Despite a rough day for cyclical shares Wednesday, Goodyear bounced nearly 5% on the news, while Cooper tacked on a few pennies in sympathy.
While Goodyear is attracting value managers — and has received positive coverage from Jeff Reeves (see here and here) — it actually might be only the second-best bet among the two major U.S. tire makers.
Goodyear Vs. Cooper
Cooper, which specializes in replacement tires, has superior growth prospects relative to Goodyear, whose business is more widely diversified. CTB beat earnings estimates earlier in the month, with first-quarter profits rising 38% to 34 cents and exceeding expectations for 31 cents. This marked the 11th consecutive quarter of profitability for the company. Goodyear also beat expectations, but it reported a loss because of refinancing costs, and it offered a less-than-stellar outlook for sales volumes through the remainder of the year. The analyst estimates stack up as follows:
|2012 Revenue||2013 Revenue||2012 EPS||2013 EPS|
In addition, analysts have revised CTB’s 2013 estimates higher over the past 90 days — from $2.34 to $2.44 — while Goodyear’s have fallen from $2.55 to $2.45.
Cooper also beats out Goodyear on the basis of what it doesn’t have: namely, a massive debt load and large pension liabilities. GT has $3.55 billion of net debt (on a $2.6 billion market cap). Although the company has been working to pay down its debt, this nonetheless adds a layer of risk that isn’t a factor with Cooper. CTB also earns a higher percentage of its revenues from the fast-growing Chinese market than Goodyear, and it tends to be more sensitive to rubber prices — a positive right now given that the price of rubber continues to soften. As a kicker, Cooper offers a 2.8% dividend yield, compared with no dividend for Goodyear. CTB just announced its 161st consecutive quarterly payout.
Goodyear has two factors working in its favor. First, its mean analyst price target ($17.29) was 61% above Wednesday’s close of $10.69. The difference for CTB, while high on an absolute basis, is lower than Goodyear at 42.4% ($21 versus $14.74). Second, Goodyear has a higher short interest: 7.1% versus 3.8% — a positive for GT shares if the stocks begin to rally.
There’s no doubt that Goodyear is cheap — it trades for just 4.4 times 2013 estimates. But Cooper is inexpensive in its own right, with a forward P/E of just 6.1. Given the company’s superior fundamentals, such a premium appears warranted. Also, as can be seen in the chart below, Cooper tends to provide more “juice” in terms of returns — a positive if you’re a believer in the broader story for global auto sales.
Goodyear offers a value opportunity for patient investors, but its debt and pension liabilities should give investors pause. In combination with its stronger fundamental profile, Cooper looks to be the better option for an investor looking to play a comeback in the tire-makers.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.