(By Balachander) Cooper Tire & Rubber Co. (NYSE:CTB) shares were upgraded to "Buy" from "Hold" by Deutsche Bank analyst Rod Lache.
"In anticipation of expiring tariffs, we have been speaking to manufacturers, dealers, and wholesalers. Our findings were encouraging, leaving us more bullish on the outlook for both Cooper Tire and Goodyear Tire (NYSE:GT) than we had been anticipating," the analyst wrote.
Lache, who has a price target of $24 on CTB, said the impact of Chinese tariffs expiring may be more benign than he previously anticipated.
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"Some tire price deflation is likely inevitable. Margins for tire companies would otherwise rise to unfathomable levels. We would focus on the spread between prices and raw materials rather than pricing in isolation," Lache wrote.
Raw materials used in tires have declined by 18% since April, and the analysts estimates that every 1% decline in raw material costs adds $0.26 to the EPS of Goodyear or Cooper tire.
Lache reiterated his "Buy" rating on the stock.
If we assume that Cooper tire gives up only 60% of the benefit of declining raw material costs (vs. our current estimate of 100%), there could be $0.62 EPS upside vs. our current est.
"The key risk to our investment thesis is the outlook for industry pricing, driven by unforeseen deterioration in the industry's supply/demand dynamic," Lache wrote.
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The stock, which has been trading in the 52-week range of $9.64 to $23.40, added 4.36% to trade at $20.81 on Monday.