A Tale of 2 Tire Makers

by Lawrence Meyers | February 28, 2012 10:57 am

The great thing about having a massive company devoted to tires is that, since people will always drive cars, they will always needs tires. So if you can navigate the occasional labor action of your unionized workers, deal with fluctuations in demand and raw-materials costs, and keep up with ever-changing consumer preferences, you’ve got staying power.

The two big public players are Cooper Tire and Rubber (NYSE:CTB[1]) and Goodyear Tire and Rubber (NYSE:GT[2]). The only other player is Bridgestone (PINK:BRDCY[3]), but it’s a thinly traded stock on the pink sheets, so I won’t delve into it.

Are either of these two worthy of a place in your portfolio?

Cooper Tire just reported strong earnings for Q4 and for 2011 overall. Sales were up a sizable 14% for Q4 and 17% for the entire year. Backing out a huge tax benefit, the company’s net income rose a very respectable 12% as a result in Q4, but for the full year, results fell a bit due to higher costs and a brief labor action.

Cooper has an impressive balance sheet, however. It sits on $234 million in cash and a very manageable debt load of $330 million, on which it pays negligible interest. Cooper manages to have enough cash flow to pay a 2.7% dividend and is not suffering under bloated pension liabilities, with about $660 million owed to the labor force. That’s a very manageable number given the company’s cash flow.

It’s difficult to project what the future holds for the tire industry because of all the variables. What I do know is that Cooper trades at 10x earnings, and sales are ramping up nicely, but this may be offset by significant increases in raw-materials costs.

With the dividend included, I think the stock would make for a very reasonable purchase with a nice chance for 10% to 15% annualized returns — but only once raw-materials costs stabilize.

Goodyear is about three times larger than Cooper in market cap, and the bigger you are, the harder you fall. The good news was that sales revenue increased along the same lines as Cooper, and Goodyear reversed a loss from 2010.

The bad news is that Goodyear missed estimates in its Q4 report, also hurt by higher raw-materials costs, and those costs are projected to increase 20% to 25% in Q1 and 5% overall annually.

In North America, the company expects the consumer-replacement market to be flat to down 2%, consumer original equipment flat to up 3%, commercial replacement up 2% to 6% and commercial original equipment up 10% to 15%. So there are many crosscurrents affecting Goodyear and industry as a whole.

While the company trades at only 6.8x this year’s earnings, Goodyear was cash-flow negative last year. There’s plenty of cash to offset this — some $2.7 billion worth — and debt is manageable at $4.8 billion. But there are too many uncertainties to consider the stock a buy. I’d even suggest selling for now and, uh, taking alternative forms of transportation.

  1. CTB: http://studio-5.financialcontent.com/investplace/quote?Symbol=CTB
  2. GT: http://studio-5.financialcontent.com/investplace/quote?Symbol=GT
  3. BRDCY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRDCY

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