Stock Analyst Notes Cooper Tires Reports Strong 1Q

Cooper Tires CTB reported strong first-quarter results, buoyed by resurgent demand for replacement tires in both its U.S. and international markets. We had expected Cooper to experience a spike in tire sales in 2010 as pent-up replacement tire demand is released. As such, we are maintaining our fair value estimate.

Cooper benefitted from strong replacement tire volumes during the quarter, with tire shipments increasing 19% year over year in the U.S. market, and 77% in its international segment. Stronger volumes helped boost the firm's profitability by increasing plant utilization (which approached 100% during the quarter) and spreading fixed costs over a greater number of tire units. We think that the firm will continue to run at almost full capacity during the remainder of 2010 due to rebounding tire demand and drastic reductions in manufacturing capacity across the tire industry.

While the uptick in tire volumes provided a noticeable tailwind for Cooper, we are concerned about the steady rise in raw material costs, which show no sign of abating. With rubber prices at an all-time high given the confluence of surging Asian demand and supply-side disruptions, Cooper experienced an 18% year-over-year increase in raw material costs, which it failed to fully offset with price increases. Management expects sequential increases in raw material costs for the second quarter of 2010 to exceed 10%. In response, Cooper announced a 7.5% price hike for its U.S. tires, to be enacted in June. While we believe these price increases will be successful in the near-term given the current tight supply-demand dynamics in the U.S. tire industry, continued appreciation of raw material costs may prove more difficult for Cooper to pass through to its customers.

(quicktake.morningstar.com)