Goodyear To Buy Cooper Tire, Shares Up 18%
Shares of Cooper Tire (NYSE:CTB) are up a robust 18% in early premarket trading and not because of the Q4 results. The company turned in a weaker than expected quarter and failed to give any guidance. The news that has shares rocketing higher is the announced takeover by Goodyear Tire & Rubber Company (NASDAQ:GT), a deal worth $2.8 billion to CTB shareholders. According to the press release, owners of CTB will get $54.36 per share in cash and stock upon completion of the transaction. When complete, Goodyear investors will own 84% of the new company.
The benefits for Goodyear Tire include merging two complementary portfolios, a more U.S.-centric manufacturing profile, and increased depth in both distribution and retail channels. The deal is expected to be accretive to earnings and revenue immediately. Cost-synergies are expected to run in the range of $165 million within the first two years of closing.
"The addition of Cooper's complimentary tire product portfolio and highly capable manufacturing assets, coupled with Goodyear's technology and industry-leading distribution, provides the combined company with opportunities for improved cost efficiency and a broader offering for both companies' retailer networks. We are confident this combination will enable us to provide enhanced service for our customers and consumers while delivering value for shareholders,” said Richard J. Kramer, Goodyear chairman, chief executive officer and president.
Cooper Tire & Rubber Misses Q4 Consensus
Cooper Tire & Rubber had an OK quarter but not one to inspire investors. The company’s $728 million in net consolidated revenue is impressive but down sequentially and from the same period last year. Not only that, the -3.0% YOY decline missed the consensus by 65 basis points and was compounded by shrinking margins. Digging into the metrics, unit volume fell -9.8% but was offset by price increases.
Net sales fell only -2.9% with strength in the International Segment. Sales in the International Segment rose 14% to account for 18.7% of net revenue. Not only that, but margins in the International Segment grew 740 basis points albeit not enough to offset declines in The Americas. Sales in the Americas, the company’s largest operating segment, fell -3.9% with a margin decline as well. Weakness in the Americas is associated with the OEM dealers and due to several factors. The first is the company’s re-focus to the higher-margin retail channels, the second is production hiccups related to microchip shortages in the auto industry.
“In 2020, Cooper continued to build upon the positive momentum that began in 2019, driven by execution of our strategic initiatives, which have successfully transformed Cooper into a consumer-driven company,” said President & Chief Executive Officer Brad Hughes. “Despite impacts from coronavirus, we delivered strong operating profit performance for the year and demonstrated that the value proposition of providing high-quality tires at an affordable price is compelling for consumers, especially in the current environment.”
Moving down to the bottom line, the company produced $60 million in operating profits or about 8.3% of sales compared to 8.5% in the year-ago period. This produced $0.75 in GAAP earnings or down -$0.29 from last year and $0.23 below the consensus target.
The Technical Outlook: Goodyear Tire Is An Attractive Buy
The news has shares of Cooper Tire up nearly 18% and very close to the $54.36 implied by the press release. Traders may wish to play that margin but investors will be better served to buy into Goodyear Tire & Rubber Company when it confirms support once again. Looking at the chart, the stock has alread confirmed a bottom if not the reversal of a multi-year downtrend. From that perspective, weakness in price action should be viewed as buying opportunities especially when coincident with generally accepted technical targets. The most obvious target is the short-term 30-day moving average near the $12.35 level.
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