Cooper Tire & Rubber Co (CTB), The Goodyear Tire & Rubber Company (GT), General Motors Company (GM): Should You Follow India Into the Tire Biz?

In June 2012, India-based tiremaker Apollo Tyres made a bid to join the industry’s upper echelon, offering to acquire Cooper Tire & Rubber Co (NYSE:CTB) for $35 per share in cash or roughly $2.5 billion. The combination would make Apollo the world’s sixth largest tiremaker and add a strong presence in the U.S. While the original equipment tire segment is controlled by giants like The Goodyear Tire & Rubber Company (NASDAQ:GT), Bridgestone, and Michelin, the replacement tire segment is more competitive and is Cooper Tire & Rubber Co (NYSE:CTB)’s historical focus. With rising government regulations and large capital expenditures to look forward to, the industry is likely to continue its consolidation. So, should investors be looking at the sector?

Cooper Tire & Rubber Co (NYSE:CTB)What’s the value?

Most passenger vehicles have four tires, so the industry obviously does better when auto sales are on the rise. The replacement market, though, is more a function of consumers’ disposable income and willingness to upgrade their wheels. Cooper Tire & Rubber Co (NYSE:CTB) built its formidable business in the latter segment by being cheaper than the industry giants and by partnering with retailers on private label brands.

In 2012, Cooper Tire & Rubber Co (NYSE:CTB) generated strong financial results and outpaced the industry with a 4% gain in domestic shipment volume. For the period, the company reported increases in revenues and adjusted operating income of 7.5% and 143.1%, respectively, versus the prior year. Despite general weakness in European markets, Cooper Tire & Rubber Co (NYSE:CTB)’s international segment also reported volume gains, as its recently purchased Serbian plant helped it to gain market share in the Eurozone. In addition, falling raw materials prices, down 7% on average for the year, led to a sharp increase in its operating margin.

With Cooper Tire & Rubber Co (NYSE:CTB) going private, the most logical sector play would be The Goodyear Tire & Rubber Company (NASDAQ:GT), one of the industry’s stalwarts, operating 52 manufacturing plants across 22 countries. The company also has a strong position in the retail arena through its national chains of consumer tire centers and commercial truck service centers. Due to heavy exposure to the weak European market, though, The Goodyear Tire & Rubber Company (NASDAQ:GT) had a relatively poor year in 2012, reporting declining unit volumes in three of its four geographical segments.

However, in FY2013, The Goodyear Tire & Rubber Company (NASDAQ:GT) has shown a spark, as higher tire sales in the domestic original equipment segment have mostly offset continued weakness in its European markets. For the six months of the year, the company reported an 3.1% decline in unit volume, but a 16.2% jump in adjusted operating income. Like Cooper, The Goodyear Tire & Rubber Company (NASDAQ:GT) has benefited from declining average prices for raw materials, leading to a wider operating margin. In addition, the company has improved its cost structure by freezing some of its pension plans and reducing its overall plant capacity.