The Goodyear Tire & Rubber Company (GT), Cooper Tire & Rubber Company (CTB): Is There More Steam Left in Rubber Companies?

Declining rubber prices this year have helped consumers of the commodity in a big way. Tire producers such as Cooper Tire & Rubber Company (NYSE:CTB), The Goodyear Tire & Rubber Company (NASDAQ:GT), and Titan International Inc (NYSE:TWI) have benefited from the trend so far, but it remains to be seen if the rally can be sustained.

Earlier this month, Cooper Tire & Rubber Company (NYSE:CTB) reported what could be called a disappointing quarterly report in a certain sense. Owing to poor demand from the auto industry and the soft state of economy, shipments dropped during the quarter. This caused revenues to drop 12.5% to $861.7 million during the quarter.

However, profits still increased as the cost of natural rubber – the biggest cost in producing tires – remained weak during the period. In North America, which accounts for nearly 70% of its business, operating margin stood at 11.9%, up 8.6 percentage points from 3.3% in the same period last year. This helped in offsetting the impact of weaker sales. Similarly, profits jumped to $56.1 million, up from $1.6 million a year ago.

The company expects its raw material costs to drop 1% sequentially in the second quarter. This, coupled with increased demand following a harsh winter, should boost profitability in the coming quarter. The company has reasonable gearing, and major valuation metrics indicate the stock is currently undervalued at $23. Deutsche Bank has a target price of $34 on the stock.

The very same factors have caused a 12% rally in The Goodyear Tire & Rubber Company (NASDAQ:GT) over the last 30 days. The company posted lower revenues but higher profits for the quarter ended March 31. Except in Europe, the company saw its margins improving in every other regional market. The Goodyear Tire & Rubber Company (NASDAQ:GT) is truly a global company with only 44.6% of its first-quarter sales coming from the North American region.

Greater exposure to Europe at the expense of North America is proving to be a combination curtailing the growth in profits, however. Unlike Cooper Tire & Rubber Company (NYSE:CTB), The Goodyear Tire & Rubber Company (NASDAQ:GT) has a high debt capital structure which makes it a somewhat less attractive stock to own. However, a forward price-earnings ratio of 5.9 is reassuring in terms of The Goodyear Tire & Rubber Company (NASDAQ:GT)’s returning to profitability. At the same time, a price-sales ratio of 0.18 indicates that the stock is undervalued.