When we think of China as an investment play, one common factor comes to mind — demographics. With a population rapidly approaching the 1.4 billion mark, it’s no wonder why President Trump sees it as an economic and political threat. At present standing, China is more populous than four United States put together.
At the same time, we have to be careful about making too many assumptions. Although China is the world’s second-biggest economy, because of its massive size its GDP per capita is only $15,400. To put that into perspective, China is sandwiched between the Dominican Republic and Palau in the global rankings. Thus, the idea of the Asian giant being a free-for-all marketplace is not entirely accurate. However, that won’t dent the enthusiasm for tire stocks.
This is due to the fact that tire stocks are a secular play. If you have a car, you can no more avoid buying tires than you can avoid changing the oil. Yes, we’ve all been guilty of stretching the intended life of our rubber. Logically, I would imagine that such antics are more prevalent in hard times than in good times. But at the end of the day, there will always be a constant stream of demand for tire stocks.
In China, the sector has a captive audience. Up until recently, the country has enjoyed a surge in new car sales. This was helped along by government incentives such as tax cuts on purchases of small-engine models. Those incentives are now gone, which created rumblings that 2017 sales growth may stall. That may be the case, but it won’t matter for tire stocks. They’re required maintenance items, and you can potentially have multiple sales per vehicle.
Here are three tire stocks that are the new play on China.
Tire Stocks for China: Goodyear Tire & Rubber Co (GT)
Last week, it somewhat accomplished that goal with an earnings beat for the fourth quarter. But GT did fall a bit short on revenue based on broadly declining sales. Investors of tire stocks, however, should pay close attention to the details.
General Motors Company (NYSE:GM), specifically the Cadillac division, has long eyed China as its lifeline, and for obvious reasons. In 2016, GM hit a significant milestone. Nearly half of all Cadillacs sold went to overseas buyers. China represented a healthy chunk of those figures, as the Buick line has a dominant presence over there. That suits GT just fine because it’s the original equipment provider for many Cadillac models.
Best of all, the markets are taking note. Year-to-date, GT stock is up 17%. Much of that has come since its fourth-quarter earnings release. Since Feb. 8, GT has gained an astounding 11%. Encouragingly, it’s having one of the best starts to the new year in quite some time.
With other tire stocks having a strong showing, expect GT to continue adding to its gains.
Tire Stocks for China: Cooper Tire & Rubber Co (CTB)
Under the partnership, Cooper branded tires will be marketed throughout Asia while also producing Roadmaster brand tires for the North American market. While it’s undoubtedly an aggressive and potentially lucrative strategy, one has to wonder what’s going through management’s mind. After all, CTB isn’t in Kansas anymore. On top of that, they’ve been burnt in a cultural transition that clearly was lost in translation.
What it boils down to is money, plain and simple. CTB must act firmly to keep up with other tire stocks, particularly the premium brands. A move into China makes the most sense considering its enormous market and still expanding infrastructure. Most importantly, the markets are digging it. Although CTB is down a percent YTD, it has shot up more than 6% since Monday.
Amid newfound optimism for tire stocks, I wouldn’t be surprised to see CTB make the most of it.
Tire Stocks for China: Bridgestone Corp (BRDCY)
As with the other cases, it just comes down to the math. Understandably, American cars are going to receive a better reception in China than Japanese cars with BRDCY-branded tires. Bridgestone, however, is also the world’s largest tire manufacturer. Whether in the premium or entry-level market, it’s virtually impossible to avoid it. And with so many new car sales in China, the opportunity for repeat business is too good to pass up.
For long suffering BRDCY investors who have seen their investment go sideways for several years, this is a welcome change. The company is getting off to a fairly good start in the markets, up 3.6% YTD. Most of that optimism has come over the past few days. Since Feb. 6, BRDCY is up 4%-plus. More critically, it blew past its 50-day moving average, signaling further optimism.
While tire stocks may not be sexy, companies like BRDCY are turning on the charm in 2017.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.