Declining rubber prices this year has helped consumers of the commodity in a big way. Tyre producers such as Cooper Tire & Rubber Company (NYSE:CTB), The Goodyear Tire & Rubber Company (NASDAQ:GT), and Titan International Inc (NYSE:TWI) have benefited from the trend so far and it remains to be seen if the rally can sustain.
Earlier this month, Cooper Tire & Rubber Company (NYSE:CTB) reported what could be called disappointing quarterly report in a certain sense. Owing to poor demand from the auto industry and the soft state of economy, shipments dropped during the quarter. This caused revenues to drop 12.5 percent to $861.7 million during the quarter.
However, profits still increased as the cost of natural rubber – the biggest cost in producing tyres – remained weak during the period. In North America, which accounts for nearly 70 percent of its business, operating margin stood at 11.9 percent, up 8.6 points from 3.3 percent in the same period last year. This helped in offsetting the impact of weaker sales and profits jumped to $56.1 million, up from $1.6 million a year ago.
The company expects its raw material costs to drop 1 percent sequentially in the second quarter. This, coupled with increased demand following a harsh winter, should boost profitability in the coming quarter. The company has reasonable gearing and major valuation metrics indicate the stock is currently undervalued at $23. Deutsche Bank has a target price of $34 on the stock.
The very same factors have caused a 12 percent rally in Goodyear Tire & Rubber Company (NASDAQ:GT) over the last 30 days. The company posted lower revenues but higher profits for the quarter ended March 31. Except Europe, the company saw its margins improving in every other regional market. Goodyear is truly a global company with only 44.6 percent of its first quarter sales coming from the North American region.
However, greater exposure to Europe at the expense of North America is proving to be a combination curtailing the growth in profits. Unlike Cooper Tire, Goodyear has a high debt capital structure which makes it a somewhat less attractive stock to own. However, a forward price earnings ratio of 5.9 is reassuring of returning to profitability. At the same time, price by sales ratio of 0.18 and price by cash value of 1.5 indicate the stock is undervalued.
Crystal gazing beyond rubber
Illinois based Titan International Inc (NYSE:TWI) is a producer of wheels and tyres with a strong focus on agricultural, earthmoving and construction industries. The company is not entirely a play on rubber prices as it supplies its specialty wheel products to original equipment manufacturers apart from selling directly to customers. This makes it a natural beneficiary of the surging demand from construction segment in the United States.
The stock currently trades at a price earnings ratio of 16.2 but the same reduces to 8.7 on a forward basis. It has a PE growth ratio of 0.94 while a price by sales ratio of 0.65 indicates the stock is undervalued and has room for further growth. However, the problem with the company is its high debt structure which contributed in lower profits in the most recent quarter despite a 25 percent jump in revenues to $ 578.4 million from the same period in 2012.
Overall, Cooper Tire & Rubber Company (NYSE:CTB) and The Goodyear Tire & Rubber Company (NASDAQ:GT) stand to gain directly from softer prices of natural rubber. Although Indonesia, Thailand and Malaysia – the three countries which control over 70 percent of the global natural rubber market – have put a plan in place to reduce supplies and strengthen prices; success of this plan is doubtful as similar plans have failed to yield intended results in the past.