General Motors disclosures should remind investors that GM has an interesting SOTP angle. While the 10K dropped language related to timing of Cruise Commercialization (we still expect this w/in the next 12-months), the company is clearly preparing for bigger things. Cruise employees and management are receiving Stock Options and RSUs that vest upon an IPO. On the negative side, GM also continues to disclose potential residual risks related to the bankruptcy of old GM (Plaintiffs want 30 MM additional shares for the GUC trust; GM will fight this at a March 11 hearing); The Takata recall could cost $1.2 bn (though GM is still seeking to avoid a recall).
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Cooper Tire reported adjusted 4Q18 EBIT of $59 MM (EPS $0.66) compared with our estimate of $54 MM (EPS $0.62). The upside vs. our estimate this quarter was more than 100% driven by a slightly less negative raw material headwind (the headwind from raw materials was just $11 MM yoy vs. our -$25 MM estimate). Looking at the numbers another way… the yoy improvement (from $47 operating profit in 4Q17 to $59 MM in 4Q18) was more than 100% entirely driven by accounting ($9 MM Pension cost shifted out of EBIT, and a $6 MM product liability gain).
There were numerous interesting takeaways from the Wolfe Research Auto Conference in Detroit, including revealing insights into recent shifts amongst U.S. New Vehicle Buyers (there may be less risk to industry mix than we perceived), the trajectory of battery costs, insights into Powertrain plans being made by Auto OEMs, and revelations on the Ride-Share business model. All of these have long term implications.
The Market is bracing for challenges as we transition to 2019, including lower Auto Production (particularly in China and Europe during 1H19), higher Rates (which raise concerns about Mix, Pricing), the strong U.S. Dollar, Regulatory Content, unpredictable Government Policy/Tariffs, the burden of increased Spending on Technology with uncertain returns, and in some cases discontinued passenger car products.
Once a quarter, we comb through corporate filings and summarize the most noteworthy datapoints. At a high level, developments during the quarter reinforced our view that investors should be Underweight Autos and Auto Parts, Underweight Dealers, and Overweight a relatively small selection of companies that fall into the Auto 2.0 category. In our view the U.S. Auto Cycle is in its 8th or 9th inning, with looming pressures on vehicle affordability. China is experiencing its first real Auto Industry downturn, and we are not convinced that the Central Government will step in to specifically prop up Autos. Europe also faces a number of challenges: These include potential trade risks (7% of Europe produced vehicles are exported to the U.S.), political risks (Brexit), and regulatory risks (vehicles more expensive to produce, at the same time that pricing has become more challenged).
CTB had been experiencing significant pressure on market share and margins over the prior 2 years. They’re on track to generate relatively low free cash flow this year (close to breakeven). And we’ve been concerned about longer term structural headwinds, including over-exposure to declining segments and declining distribution channels within the North American Tire market (<17” tires account for 56% of CTB’s U.S. mix; this segment is expected to decline by 6-7% per year).
Cooper Tire reported 3Q18 results before the Open on Monday. Ex a $31 MM product liability gain, results would have been in-line: EBIT $51 MM (6.9% margin); close to WRe $54 MM (7.0% margin) but not particularly strong (as of earlier this year CTB expected margins to reach 9-11% by now). But CTB rallied 21%! What happened?
We get a considerable amount of intra-quarter data on the Tire Industry – The USTMA releases data on U.S. Wholesale Tire Shipments; Michelin provides this data for other markets; we see data on tire imports from the Dept. of Commerce; and we can gather data on industry pricing from trade publications and the U.S. Tire PPI. However, we do not always get great intel on company specific performance, which could vary significantly. We’d note, for example, that during Q2 CTB’s U.S. LV volume declined by 3.3%, contrasting sharply with the broader U.S. market, which was up 4.2%; and during 2017 CTB’s U.S. shipments declined 10%, contrasting with a 0.2% increase for the overall U.S. market. All of that said, we cannot ignore one very specific datapoint which seems to suggest very strong CTB market share gains during the quarter: American Tire Distributors (the largest U.S. wholesale distributor) Chapter 11 filing on Oct. 4 contained disclosure that CTB was their 2nd largest Tire OEM creditor,
We’ve been bracing for a tough Q3 earnings season. European Auto production, China Production, and FX headwinds all intensified over the course of the quarter. We’ve been expecting misses/guidance revisions from number of companies in our Universe (Based on the company’s business model and regional profile, Delphi struck us as the most at risk prior to Friday’s pre-announcement). But we’d note that the risks are not equal. BWA already adjusted guidance at their CMD. AXL may even have upside. Our analysis also suggests surprisingly benign results/guidance from LEA, DAN, MGA, and APTV. On the other hand, consensus for GM, F, GT, CTB, ALV, VC, and VNE may require downward adjustments.
Cooper Tire has experienced significant pressure on market share and margins over the past 2 years. The key question for investors is whether they can recover and achieve mid- to longterm operating margin improvement (CTB’s 2018E operating margin will likely be in the mid-5% range, down from 13.5% just two years ago; their mid-term target is 9-11% and their long-term target is 10-14%)
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