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2008-08-17 BACK
U.S. Tire Industry Analysis and Cooper Tire Company Assessment
U.S. Tire Industry Analysis and Cooper Tire Company Assessment This article originally appeared in the Texarkana Gazette on August 17, 2008 Business Matters Dr. Ed Bashaw, Dean, Texas A&M-Texarkana College of Business Cooper Tire in Texarkana employs more people locally than any other Texarkana industrial employer. Clearly they are an important bellwether for Texarkana's industrial sector. The performance of Cooper Tire, Inc. and the local unit is highly correlated with the national tire industry. To gain a broader perspective and a deeper understanding of Cooper Tire's future performance, we need to look at the U.S. tire industry. I write today's column to report some of my findings about the tire industry, to review Cooper's first half performance, and to discuss issues related to Cooper's future performance. According to Hoovers, the U.S. tire manufacturing industry produces over 300 million tires each year and enjoys over $13 billion in annual sales revenue. This industry is highly concentrated. While over 100 companies currently operate approximately 160 U.S. plants, four tire manufacturers (Goodyear, Bridgestone, Michelin, and Cooper) account for about 75% of the market. Also, about 35 major tire plants have over $100 million in sales. These major tire plants represent about twenty percent of the U.S. total and account for roughly eighty percent of the volume, yet another application of the 80-20 rule. Tire demand comes from two broad areas: new vehicle sales (OEM's) and replacement tires. The replacement tire segment is the largest segment with around 80% of U.S. sales. Cooper Tire competes exclusively in this market segment. As you might expect, industry demand in replacement tires is a function of number of miles driven and the vehicle's length of service. Consumer tire selection depends on cost and quality. Major cost factors are labor costs and the cost of raw goods. Quality is affected by new technical advances in the tire and consistency in manufacturing. During the latter half of 2007 and continuing through the first half of 2008, the U.S. tire industry suffered mightily. The tie to crude oil prices seems pretty clear. Consider the stock prices of Cooper and Goodyear. Both slumped to 52 week stock price lows in July, 2008. A check of crude oil prices shows record highs of about $145/barrel during this same time period. The most recent stock price highs for both of these tire manufacturers occurred a little over a year ago (June/July 2007). What was the per barrel cost of crude oil at that time? It was $65 to $70 per barrel. (Wow! That seems an eternity.) Over the last couple of years Cooper Tire has generally held onto a 7% US market share. This volume now is achieved by three U.S. Cooper Tire plants (Texarkana, AR; Tupelo, MS; and Albany, GA). Our Cooper Tire factory has lost personnel (but not as many as anticipated), while at the same time converting to a "flex plant." The plant now is geared to produce a wider variety of tires, at a faster rate, and with lower volume per tire style. How has Cooper's stock performed? Those same industry factors (effects of $145 per barrel crude oil prices) have had a major impact on Cooper's stock price. At the time of writing this column, Cooper stock traded just over $10, up from a 52 week low of just over $7 in July, but well below their 52 week high of near $26. The increased stock price has come with the recent decline in crude oil prices. What about the future? Based on reading industry reports and speculation about the three Cooper plants, our local plant seems to be positioned well for at least medium run survival from any future plant closings. While the move to becoming a flex plant has cost at least 100 jobs, the hard to replace specialization skills (that the plant now possesses because of the specific workforce training and know how) bodes well for the local Texarkana plant. Industry reports indicate the Albany, GA plant would appear to be the plant most likely to be closed next, if necessary, based on comparative plant performance and total plant cost of tire production. Future Cooper performance also is tied to the economy. High crude oil prices means higher manufacturing costs and less consumer driving. Both negatively affect consumer tire demand. On the other hand, since Cooper completes exclusively in the replacement tire arena, it would reap comparative benefits from the effects of this economy. Today's economic factors influence consumers to keep their cars longer and make fewer new car purchases. Cooper benefits from this. A positive effect for Cooper (at least the local plant) of high crude oil prices is that the shipping and distribution cost advantages of foreign manufactured tires is at least partially negated. Future trends in crude oil prices are positive for consumers with steep price drops coming over the last few weeks. I've read predictions of $3 per gallon gas around December of this year. Those factors combine to lower the cost to manufacture a tire and to increase the average number of miles driven – a net positive for Cooper. My guess is that Cooper is positioned for a solid second half. We'll see. As always, please email me at Edward.Bashaw@tamut.edu with your thoughts and comments. (Dr. Bashaw is the Dean of the College of Business at Texas A&M University-Texarkana)
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U.S. Tire Industry Analysis and Cooper Tire Company Assessment
U.S. Tire Industry Analysis and Cooper Tire Company Assessment This article originally appeared in the Texarkana Gazette on August 17, 2008 Business Matters Dr. Ed Bashaw, Dean, Texas A&M-Texarkana College of Business Cooper Tire in Texarkana employs more people locally than any other Texarkana industrial employer. Clearly they are an important bellwether for Texarkana's industrial sector. The performance of Cooper Tire, Inc. and the local unit is highly correlated with the national tire industry. To gain a broader perspective and a deeper understanding of Cooper Tire's future performance, we need to look at the U.S. tire industry. I write today's column to report some of my findings about the tire industry, to review Cooper's first half performance, and to discuss issues related to Cooper's future performance. According to Hoovers, the U.S. tire manufacturing industry produces over 300 million tires each year and enjoys over $13 billion in annual sales revenue. This industry is highly concentrated. While over 100 companies currently operate approximately 160 U.S. plants, four tire manufacturers (Goodyear, Bridgestone, Michelin, and Cooper) account for about 75% of the market. Also, about 35 major tire plants have over $100 million in sales. These major tire plants represent about twenty percent of the U.S. total and account for roughly eighty percent of the volume, yet another application of the 80-20 rule. Tire demand comes from two broad areas: new vehicle sales (OEM's) and replacement tires. The replacement tire segment is the largest segment with around 80% of U.S. sales. Cooper Tire competes exclusively in this market segment. As you might expect, industry demand in replacement tires is a function of number of miles driven and the vehicle's length of service. Consumer tire selection depends on cost and quality. Major cost factors are labor costs and the cost of raw goods. Quality is affected by new technical advances in the tire and consistency in manufacturing. During the latter half of 2007 and continuing through the first half of 2008, the U.S. tire industry suffered mightily. The tie to crude oil prices seems pretty clear. Consider the stock prices of Cooper and Goodyear. Both slumped to 52 week stock price lows in July, 2008. A check of crude oil prices shows record highs of about $145/barrel during this same time period. The most recent stock price highs for both of these tire manufacturers occurred a little over a year ago (June/July 2007). What was the per barrel cost of crude oil at that time? It was $65 to $70 per barrel. (Wow! That seems an eternity.) Over the last couple of years Cooper Tire has generally held onto a 7% US market share. This volume now is achieved by three U.S. Cooper Tire plants (Texarkana, AR; Tupelo, MS; and Albany, GA). Our Cooper Tire factory has lost personnel (but not as many as anticipated), while at the same time converting to a "flex plant." The plant now is geared to produce a wider variety of tires, at a faster rate, and with lower volume per tire style. How has Cooper's stock performed? Those same industry factors (effects of $145 per barrel crude oil prices) have had a major impact on Cooper's stock price. At the time of writing this column, Cooper stock traded just over $10, up from a 52 week low of just over $7 in July, but well below their 52 week high of near $26. The increased stock price has come with the recent decline in crude oil prices. What about the future? Based on reading industry reports and speculation about the three Cooper plants, our local plant seems to be positioned well for at least medium run survival from any future plant closings. While the move to becoming a flex plant has cost at least 100 jobs, the hard to replace specialization skills (that the plant now possesses because of the specific workforce training and know how) bodes well for the local Texarkana plant. Industry reports indicate the Albany, GA plant would appear to be the plant most likely to be closed next, if necessary, based on comparative plant performance and total plant cost of tire production. Future Cooper performance also is tied to the economy. High crude oil prices means higher manufacturing costs and less consumer driving. Both negatively affect consumer tire demand. On the other hand, since Cooper completes exclusively in the replacement tire arena, it would reap comparative benefits from the effects of this economy. Today's economic factors influence consumers to keep their cars longer and make fewer new car purchases. Cooper benefits from this. A positive effect for Cooper (at least the local plant) of high crude oil prices is that the shipping and distribution cost advantages of foreign manufactured tires is at least partially negated. Future trends in crude oil prices are positive for consumers with steep price drops coming over the last few weeks. I've read predictions of $3 per gallon gas around December of this year. Those factors combine to lower the cost to manufacture a tire and to increase the average number of miles driven – a net positive for Cooper. My guess is that Cooper is positioned for a solid second half. We'll see. As always, please email me at Edward.Bashaw@tamut.edu with your thoughts and comments. (Dr. Bashaw is the Dean of the College of Business at Texas A&M University-Texarkana)
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