Cooper Tire Hitting the Skids
A challenging North American auto environment, elevated raw material costs, and strong competition make us rate Cooper Tire & Rubber Company (CTB) a Sell with a six-month target price of $7.00.
Cooper Tire operates in a highly competitive industry, which includes giants like Bridgestone Corporation, Goodyear Tire & Rubber Company (GT) and Groupe Michelin. These competitors are substantially larger and serve original equipment manufacturers (OEM) as well as the replacement portion of the tire market. The company also faces competition from low-cost producers in Asia and South America. Some of those producers are foreign subsidiaries of Cooper's competitors in North America.
Competition primarily hinges on price, quality, availability through appropriate distribution channels and relationships with dealers. Warranty, credit terms, and other value-added programs also influence buy decisions.
On June 24, Cooper Tire announced that it has reduced production in its North American facilities to counter lower tire demand and shortages of certain raw materials. The production curtailments during the second quarter will cost $12-$14 million. On June 18, Cooper Tire announced that it has signed an agreement to invest in a tire-manufacturing plant in Guadalajara, Mexico, which will be owned by Cooper, IBSA, a Mexican holding corporation, and Cooperativa TRADOC S.R.L., employee owners of the plant, Corporación de Occidente. Cooper has 38% ownership in the plant worth $31 million.
Sony Corp. Struggles Continue
We believe Sony Corporation (SNE) will continue to struggle as it faces competition from innovative digital products and increasing competition from low-cost Asian manufacturers as the consumer market slows.
While its gaming division turned to profit during Q1 due to improvements in PS3 and PSP operations, overall results were disappointing. Sony posted weak first quarter results with flat revenues, and lowered its 2008 earnings outlook.
Sluggish consumer spending in some of its key markets and intense pricing pressure has hurt revenue while variable costs have risen. Moreover, with increased competition and lackluster demand, LCD projection television prices have come under pressure, prompting Sony to exit the business. Also, weak performance of its affiliates, such as Sony Ericsson led to a decline in its profitability.
In recent years, though Sony has been actively restructuring to improve profit in its core electronics division, the hefty startup costs for the PS3 and slow ramp are still weighing heavily on its revival efforts.
