Sector Snap: Tire makers' shares rebound
DETROIT (AP) — Shares of the two biggest U.S. tire makers rose Monday after an analyst said he is more bullish on the industry.
The statement by Deutsche Bank analyst Rod Lache came after he concluded that Wednesday's expiration of U.S. tariffs on Chinese-made tires wouldn't have a huge impact on the industry.
Lache told investors that he's upgrading his rating for Cooper Tire & Rubber Co. from "Hold" to "Buy," and he is reiterating a "Buy" rating for Goodyear Tire & Rubber Co. Shares of both companies rose in Monday afternoon trading. Cooper Tire was up 86 cents, or 4.3 percent, to $20.81, while Goodyear rose 6 cents, or 0.4 percent, to $12.78.
Analysts have said that once the tariffs expire, some tire makers may cut prices in the U.S. to pick up market share. Many tire companies that sell in the U.S. also make tires in China and import them here.
But Lache wrote that the impact of the tariffs expiring may be more benign than expected. Prices of Chinese-made tires have lagged the rest of the market since August of 2009, and they've also lagged raw material cost inflation since 2009. So tire makers may want to recoup some of those costs. "Consequently we do not see scope for dramatic price declines," Lache wrote.
Other factors could help U.S.-based tire companies. Tire raw material prices have fallen 18 percent since April, and for every 1 percent drop, Goodyear and Cooper gain 26 cents in earnings per share, Lache wrote. The industry's factory capacity reduction also suggests that supply-and-demand balance is likely to remain favorable and support profitability for the companies, according to Lache.
"The key risk to our investment thesis is the outlook for industry pricing, driven by unforeseen deterioration in the industry's supply/demand dynamic," Lache wrote.
The duties on Chinese tires began in 2009, when the Obama administration imposed a three-year tariff, starting at 35 percent, on imports of low-grade Chinese tires. The tariff fell to 30 percent in the second year and to 25 percent this year. The United Steelworkers Union pushed for the penalty tariffs, saying a surge of tire imports from China had cost 5,000 U.S. tire workers their jobs since 2004. The tariff was approved after imports of those tires rose threefold to about 46 million tires between 2004 and 2008.
Last year the WTO rejected an appeal from China and found that the United States acted consistently with its obligations in imposing the duties.