I have been following Cooper Tire and Rubber (CTB) for over a year now. I have a friend in a small town that owns a tire shop and sells Cooper Tires. Last year around this time he told me to look into the stock as it was around $8 a share and I started tracking CTB. The stock rose quickly as oil prices started dropping. It you are looking for a hedge to lower oil prices you may want to look into CTB.

Yesterday CTB announced they cut second-quarter production at their North American facilities, blaming lower tire demand and expected shortages of certain raw materials. CTB said that the cuts are expected to cost between $12 million and $14 million.

S&P estimates that sales will rise 5% in 2008 due to price increases and a favorable sales mix offsetting weak replacement tire volume. They also believe that due to the current economic environment, consumers are driving fewer miles and deferring tire purchases.

CTB is also hurt by higher raw material, energy and material costs outweighing benefits from cost-cutting efforts. In addition to initiatives implemented in 2007 that targeted $100 million in annualized cost savings, CTB plans to achieve an additional $70 million profit improvement via various strategies. Also, margins should benefit from increased production of tires in China through its 51% ownership of Cooper Chengshan.

CTB's product mix should benefit from introducing new products for premium broadline and touring and an increase in the volume of Asia sourced production. CTB has been capacity-constrained in the tire segment. S&P expects this situation to ease and sees expanded domestic production.

The sale of CTB's auto parts business generated enough cash to retire merger-related debt but expect the company to retain some debt, repurchase shares, and invest in the growth of the tire business. CTB should benefit from efficiency improvement efforts in the U.S. and greater use of lower-cost manufacturing locations, primarily in China. In November, the company authorized the repurchase of up to $100 million of its shares. S&P has a 12-Month Target Price of $17.00

The Bottom Line
I think consumers can only hold off on buying new tires for so long and CTB should start to recover as consumers look to purchase low cost tires. Another big boost to CTB would be if oil prices start to drop after the summer driving season ends. This is a stock that I would take a look at and keep as a sort term holding of 9 to 12 months. I don't think CTB will be increasing it's dividend anytime soon but this could be a great place to earn the 5% dividend on your money as the tire industry makes a comeback. Make sure your seat belt is buckled and keep your eye on the road with this stock.

Disclose: The Div Guy bought shares of CTB this morning while finishing this post.