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On Jan 3, we maintained our Neutral recommendation on Cooper Tire & Rubber Co. (CTB - Analyst Report) due to its poor performance in the second quarter of 2013 and termination of the company’s merger agreement with Apollo Tyres. However, we are optimistic about the benefits from the high-performance products and the company’s focus on improving business operations.

Why the Reiteration?

On Aug 8, 2013, Cooper Tire posted second-quarter 2013 earnings of 55 cents per share, down 33% from 82 cents in the prior-year quarter. The results lagged the Zacks Consensus Estimate of 89 cents.

Net earnings also declined significantly to $35 million from $52 million in the second quarter of 2012. Revenues fell 16.5% year over year to $884 million in the quarter, missing the Zacks Consensus Estimate of $986 million.

Following the release of second-quarter results, the Zacks Consensus Estimate for 2013 fell 6.7% to $2.50 per share. The Zacks Consensus Estimate for 2014 declined 1.7% to $2.87 per share. Hence, Cooper Tire now carries a Zacks Rank #3 (Hold). Notably, some of its competitors in the tire and rubber industry include The Goodyear Tire & Rubber Co. (GT - Analyst Report) and Bridgestone Corp. .

We expect Cooper Tire to benefit from its high-performance products which cater to the current market demand. The company is also poised to increase profitability by focusing on its product mix. Cooper Tire’s latest products include WM-SA2, Weather-Master Snow and Discoverer M+S Sport, which are useful in winter. The company also launched the Mastercraft premium off-road tire.

Cooper Tire will expectedly gain from its efforts to improve business operations. The company is optimally positioned due to its quality brands, loyal customer base, and worldwide network of manufacturing facilities, efficient workforce and advanced technology.

However, we are concerned about the termination of the merger agreement with Apollo Tyres Ltd. The acquisition would have resulted in benefits of operating scale, sourcing benefits, technology, product optimization and manufacturing improvements. These would have bolstered earnings before interest, taxes, depreciation and amortization (EBITDA) by $80–120 million per annum after 3 years.

Other Stocks That Warrant a Look

A better-placed stock in the industry in which Cooper Tire operates is Continental AG (CTTAY), with a Zacks Rank #1 (Strong Buy).

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