This Stock Is A Classic Mid-Cap Value

For the past three years, I've driven an SUV and a pickup. I got an unbelievable deal on the pickup (I always buy used), but it needed new tires. When I took the truck to the friendly neighborhood tire guys to replace them with similar all-terrain tires, I then understood why they were so friendly and why the truck was such a good deal. Ouch.

I'm not alone. Currently, light trucks and SUVs represent 63% of 2016's record year for U.S. vehicle sales, which came in at 17.55 million. Three years ago, the truck and SUV share of auto sales was right at 50%.

As far as cars on the road in the United States, the average age of a vehicle in the light truck/SUV category is around 6.1 years. Eventually, tens of millions of tires will be replaced to the tune of $800 to $1,400 a set.

That's why I'm looking at Cooper Tire and Rubber Company (NYSE: CTB ) .

Cooper is the number five tire manufacturer in North America and number twelve worldwide, with 2016 sales of $2.92 billion. Why do I want to buy the middle of the pack? First, the stock is a genuine value with attractive internal metrics that position it for price appreciation. Second, the company makes an attractive takeover target.

The valuation metrics make a compelling case on their own. Currently, the stock trades with a forward P/E of 11.45, a 37% discount to the S&P 500 on a forward P/E basis. When pundits complain that there's no real value in the current market, they'll get no sympathy. You can ALWAYS find value versus the benchmark!

The internal numbers are just as intriguing. Price-to-sales sits at an undervalued 0.8. Long-term debt-to-capitalization is at a comfortable 28.8% -- not bad for an industrial manufacturer. The most impressive number, however, is the return on equity (ROE) of 24.17%. Historically, analysts consider a consistent ROE of 15-20% attractive. Cooper Tire regularly beats that average by 20%.

Going forward, the company expects to grow sales at an average annual rate of 6.5% over the next two years. The best opportunity to do this lies with the company's international efforts. A full 85% of Cooper's annual sales are from North America. Clearly, emerging markets in Asia and Latin America will be the key drivers.

The attractive metrics are also what make Cooper an acquisition candidate. After the company's failed merger with British tire maker Apollo Tyre in 2013, the most likely suitor would be Germany's Continental AG (ETR: CON). A Reuters story from October 2016 alluded to Continental's interest in acquiring market share in the replacement tire market.

While Continental holds the number four spot globally for tire manufacturers, Continental and Cooper both hold a 7% share of the North American market. Continental's $40.2 billion market makes a $2.2 billion acquisition of Cooper Tire an easy hurdle to clear and a relatively cheap path to doubling share in the all-important North American market.

Risks To Consider: The largest risk Cooper faces is its thin share of its primary market. It's ability to grow share organically hampered by its mid-cap status in the face of its large cap peers. However, management has faced this challenge through successful execution and keeping the balance sheet healthy.

Action To Take: As a standalone investment, CTB shares are classic mid-cap value. The company chugs along, executes dependably, and has paid a dividend for 180 consecutive quarters (that's 45 years in civilian talk). The company is equally attractive as a takeover target for a larger, international manufacturer looking to grow North American market share.

The stock currently trades around $43 with a forward P/E of 11.45 and a dividend yield just shy of 1%. Based on management's consistent track record, a 12-month price target of $50 is reasonable. A takeover target price is a bit more difficult to determine. However, my conservative guess would be a premium of 20-25% over the current price. Either way, investors are poised to benefit.

Editor's Note: This is the most boring chart you'll see all year. It's not production or consumption. It's not imports or exports. It's not any economic statistic at all. It's simply how much money this program has been piling up since we launched it seven years ago. Go here to see if it's for you .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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