2023-07-12 02:30:03 ET
Summary
- Shares of auto parts company Cooper-Standard Holdings Inc. have returned over 85% since November 2022, outperforming the S&P 500 which returned just over 15% in the same period.
- Despite strong performance, the company's shares have not been able to break out of a multi-year bearish trendline dating back to 2018, indicating a long-term bear market.
- Concerns over the company's growth and balance sheet, including missed earnings estimates and a significant increase in current liabilities, suggest that a further rise in share price may not be imminent.
Intro
We wrote about Cooper-Standard Holdings Inc. ( CPS ) back in November of last year when we stated that higher prices were in store for the auto parts company. Bullish forward-looking EPS revisions, rising margins, as well as an ultra-low valuation, were key reasons why we believed CPS was undervalued at the time. Since that November commentary, shares have returned over 85% or just over $6.50 a share in what has been a sizable move for the Michigan operator. To put this in context, the S&P500 has returned just over 15% over the past eight months so long CPS investors have beaten the market by a considerable margin so far in calendar 2023.
In saying the above and considering the cyclical nature of the auto industry, investors who remain invested in this space should always stand at the ready with respect to the rebalancing of their portfolios. If we pull up an intermediate chart of Cooper-Standard for example, we can see that shares (Despite the stock's strong rally since June of last year) have still not been able to break out above the multi-year bearish trendline which dates back to 2018. This means under all intents and purposes that CPS remains in a long-term bear market as lower lows and lower highs remain the order of the day in this play.
Therefore, we have to decipher whether the stock at this juncture can garner the necessary momentum to punch above this heavy overhead resistance over the near term. The one disclaimer here is that the longer the trend lines remain intact and the more contact points they accumulate over time, the harder it will be for Cooper-Standard to finally break out to higher highs.
Growth Worries On The Horizon
Although management focused on 12-month comparable quarterly numbers on the recent Q1 earnings call, sequential trends were not as impressive with earnings missing estimates in the first quarter. In fact, the reason for the strong rally in shares of CPS over the past 12+ months was directly aligned with the strong performance we were witnessing in CPS's financials. Gross profit had increased from $21.5 million in Q1 of last year to $54.3 million in the fourth quarter. This strong performance led the company to finally eke out an operating profit of roughly $2 million in the fourth quarter of last year. In the first quarter of this year, however, operating profit (-$13.8 million) once more dipped into negative territory on higher operating costs overall ($55.6 million).
Following on from this, CPS's gross margin of 6.1% in Q1 this year fell sequentially against the same metric in the fourth quarter (8.36%) last year. Suffice it to say, in an inflationary environment, sales growth (which Cooper-Standard has been achieving) is not the metric investors should be focused on here but rather the trend of CPS' gross margin as this will govern the company's profitability. Lean initiatives and an improved sales mix have helped in recent quarters to keep 'costs of goods sold' under control somewhat but you feel that management is coming to the end of its tether with these initiatives.
Balance Sheet Concerns
Suffice it to say, when margins are so tight, liquidity and solvency trends for that matter become crucial areas that investors focus on. At the end of the first quarter, for example, we witnessed a sizable disimprovement in liquidity with current liabilities increasing almost $100 million to reach $730.3 million. Furthermore, although stated current assets only declined by $8 million, there was a sizable drop in cash (decreased by $81 million) with both inventories and receivables growing in the quarter. The CFO pointed to its undrawn revolver facility as the liquidity backup available to maintain operations if needed be. While the untapped revolver does provide support, trends in CPS' working capital are not as strong presently as in previous times.
Drawing down the revolver will only increase the company's debt which already stands at a growing $973 million. This leverage resulted in interest expense of over $30 million in the first quarter, which is the largest quarterly number we have seen in CPS for quite some time. To put this number in context, CPS' interest expense made up 72% of the company's gross profit in the first quarter of this year. Suffice it to say, strong working capital performance will be needed in upcoming quarters to ensure sustained investment can continue to be made in the company. Current trends, however, show that a rising share price (technical breakout) may not be in store for CPS at this moment in time.
Conclusion
To sum up, although shares of Cooper-Standard have enjoyed robust gains this year, recent trends demonstrate that the stock may not have the required momentum to break out above heavy overhead resistance. Let's see what Q2 brings. We look forward to continued coverage.
For further details see:
Cooper-Standard: Time To Take Profits (Rating Downgrade)