Cooper Tire Run Over by High Costs

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Cooper Tire & Rubber (NYS: CTB) reported stronger sales in its third quarter thanks to improving its product and price mix, but still saw profits nosedive. The numbers fell way short of Street estimates and sent shares spiraling down 9%. The two major speed breakers in Cooper's way are ever-rising input costs and consolidation in the industry. Let's hop on board for a closer look.

The numbers
Higher prices coupled with more volume helped revenue zoom 19% to $1.05 billion, crossing the billion-dollar mark for the first time in the company's history. Demand for the company's ultra high performance, light-truck, and commercial tire product lines helped boost the top line.

The tire industry has been plagued with high input costs primarily because of an increase in synthetic and natural rubber prices. Higher input costs affected the company's margins, with gross margin declining to 9% from 15% a year earlier. Net income buckled 61% to $17.3 million.

Higher costs have forced tire makers to push up prices of their products. Cooper plans to hike prices a further 5% in the U.S. It increased prices in March by 8%-9%, but that wasn't enough to offset costs. Cooper must be careful with its price hikes and keep in mind that it needs to both capture the tire market and remain on an even keel with its competitors in a coalescing industry.

Peers overtaking?
Mergers and acquisitions have brought about a wave of consolidation in the tire industry, tilting the competition in favor of certain companies. Titan International's (NYS: TWI) acquisition of Goodyear's Latin American farm tire business helped it post record revenues and profits in its most recent quarter. Goodyear (NYS: GT) enjoyed a 22% rise in profits by promoting high-end tires even though units sold remained unchanged from a year ago. This shows that Goodyear is in a position to successfully pass on higher costs to consumers.

The road ahead
Following rave reviews for the Cooper Zeon RS3-A ultra high performance tire, the company has launched the Discoverer A/T3 tire. The product is already generating a positive response. Cooper has been reinventing itself, trying to improve its product portfolio at every step, and believes that there is pent-up demand in the market just waiting to explode. If and when that happens, Cooper can expect higher top-line growth. 

The company is also hoping that its operations in China and Mexico will help drive growth in the long run. To that effect, Cooper has put in $134 million to increase ownership levels in the two countries.

These efforts should pay off in the long run, but for now, Cooper must find a way to effectively pass on the pressures of high input costs to its consumers. It expects raw material costs to stabilize going ahead. If that happens, the company might witness better numbers. To keep a close eye on Cooper as it battles high synthetic rubber prices, click here to add it to your own stock Watchlist.

At the time this article was published Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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