The company has taken several combative actions to bolster its capital. We expect significant overhangs for the industry and for MTG, in particular, for at least the next several quarters. We have moderated our FY08 EPS loss expectation slightly, and lowered our FY09 EPS expectation for continued pressures on the housing markets.
Currently, the shares of MTG trade at 0.45x its 1Q08 book value of $23.90 per share above its peer group median. Given the industry overhangs, our new six-month price target of $8.85 per share incorporates a blended median and MTG's current multiple, or 0.40x to our book value estimate of $22.10 per share for September 30, 2008. We think the current valuation is tenuous at best, as any negative deviation from expected results or additional negative trends from the housing market data or overall economy should be expected to be amplified on the shares of MTG.
Cooper Tire Downgraded to Sell
Cooper Tire & Rubber Company (CTB) specializes in the manufacture and marketing of automotive products. However, a challenging North American auto environment makes us downgrade the stock a Sell with a six-month target price of $7.00.
In the first quarter, excluding one-time items, the company reported diluted earnings per share of $0.02 from continuing operations, versus $0.31 from the same in the corresponding quarter of 2007. Net sales in the quarter were $679 million, down $10 million over the prior year period. North American Tire operations recorded a 3% in sales to $498 million from the last year due to the lower unit volumes partially offset by improved mix.
The largest volume decreases were in the areas of economy passenger and light truck tires. Sales in the International Tire Operations grew 27% to $232 million due to the increased volumes and price in Asia as well as improved pricing in Europe.
The company repurchased 803,000 shares for $14 million in the first quarter, thereby leaving about $40 million in authorization for share repurchase. This brought the company's total share repurchase in the last 6 months to 3.8 million, or 6% of the company's outstanding shares. Currently, CTB is trading at 28.4x our 2008 EPS estimate of $0.35.
GM Now a Sell Recommendation
We are compelled to downgrade General Motors Corporation (GM) shares to Sell as weak North American sales, falling production volumes, and rising raw material costs increase our concerns. We set a six-month target price of $12.50. This is 5.5x our 2009 earnings estimate.
Industry-wide manufacturing overcapacity is putting pressure on original equipment manufacturers (OEMs) such as GM, Ford (F) and Chrysler LLC. The company is also at a disadvantage compared to its competitors owing to huge pension and healthcare costs.
Finally, our outlook for the Auto and Auto Parts Sector industry is Negative. Investors should under-weight auto stocks for the time being. On June 3, GM announced plans to close four pick truck plants. It also announced plans to manufacture a car that could get 45 miles per gallon and sale or remake its Hummer brand.
The recently ended three-month strike at the plants of its major parts supplier, American Axle (AXL), is expected to have the biggest effect on GM. The strike forced GM to temporarily close or cut down production at more than 30 factories.
The company has already lost $800 million and produced 100,000 fewer vehicles in the 2008 first quarter. GM now expects the strike to cost $1.8 billion before taxes in the 2008 second quarter. The company is valued at 7.4x our 2009 estimate of $2.27.
