Deutsche Bank Resumes Cooper Tire & Rubber (CTB) at Hold

Deutsche Bank resumed coverage on Cooper Tire & Rubber (NYSE: CTB) with a Hold rating and a price target of $37. Despite the Hold rating, analyst Rod Lache thinks opportunities are skewed to the upside.

"The key driver will be the trajectory of North American margin normalization, vs. the trajectory of International margin improvement." said Lache. "CTB is benefiting significantly from improved pricing dynamics in North America, driven in large part by proposed tariffs on Chinese Passenger Tire imports. But we believe that these results are well above trend, and well above levels that are sustainable. U.S. market participants are already surprised at how easy it has been to find alternative sources of supply. And we see significant capacity coming online. As a result, we expect North American margins to normalize."

"CTB’s International businesses, which will account for ~15% of 2015 sales, are expected to be around breakeven in 2015 (they contributed 34% of the company’s earnings in 2013). Factors dragging on profitability include the fact that CTB maintained significant infrastructure in China even after the sale of this business, in anticipation of replacing its loss with M&A. Europe has also been weak. But we believe that CTB has options to improve this business," continued the analyst.

Lache added, "In our base case, CTB achieves EPS of $3.10 by 2017 based on a modest margin decline in North America (margins normalize at 10.8% vs. 12% in 2015), and modest improvement in International (margins reach 2.0% vs. - 1.0% in 2015). We would expect CTB’s shares to trade at $37 based on this view (12x 2017). In a bull case, CTB deploys $250MM to purchase a ~$400MM business in China (adds $0.28), and they also benefit from synergies (internalizing 2-3 MM units currently purchased externally, which adds another $0.26-$0.38). Through the combination of these two factors, 2017 EPS could rise to $3.70. Applying a 12x multiple, our valuation could potentially increase to $44 from $37."

For an analyst ratings summary and ratings history on Cooper Tire & Rubber click here. For more ratings news on Cooper Tire & Rubber click here.

Shares of Cooper Tire & Rubber closed at $34.99 yesterday.

You May Also Be Interested In

• UBS Starts Yushu Technology Co (688836:CH) at Neutral
• Affirm Holdings (AFRM) Reiterated at Market Outperform by Citizens on Continued Upside
• ULTA Beauty (ULTA) PT Raised to $667 at Goldman Sachs