Leaner Company And Pass-Through Contracts Will Allow Cooper-Standard To Emerge As A Winner

freedom007/iStock via Getty Images By mid-January, our recommendation on Cooper-Standard ( CPS ) stock was doing well as the stock was up 28% to $27 per share. However, it has dropped almost 50% to $14.50 since then. In this article, I will elaborate as to why I think the stock price dropped and whether CPS is still a good investment. Seeking Alpha 4Q21 and FY results

Similar to the third quarter, revenues continued to be impacted by the supply constraints and margins compressed due to raw material and wage inflations. Specifically, in 4Q21, revenues declined almost 14% to 601.3M USD and gross margins compressed from 11.5% to 4.7%. As per SG&A, while it increased 55bps compared to 4Q20, it is 78bps lower than 3Q21 thanks to cost savings and further restructuring. The liquidity is still strong with 248M USD of cash and a further 148M USD available in the revolving facility.

For FY2021, revenues declined 1.8%, and the 250bps compression in gross margin was slightly offset by the 120bps improvement in SG&A. Specifically, in the year, CPS experienced 64M USD in raw material inflation, 41M USD in wage inflation and 7M USD in supply constraints. Those headwinds were partially offset by 33M USD in operational efficiency, 32M USD in reduced SG&A and 16M in restructuring savings. 2022 Guidance

Management provided initial guidance for 2022. The guidance is based on the IHS Markit forecast for vehicle production. Management expects revenue to grow 11%-20%, EBITDA margin to improve slightly to 2%, capex intensity to be similar to 2021, further restructuring expense and a substantial tax refund. Sales: 2.6-2.8B USD

EBITDA: 50-60M USD

Capex: 90-100M USD

Cash Restructuring:20-30M USD

Net Cash Tax Refund: 30-40M USD

Embedded in this guidance, they expect a further 70M USD inflation in material and 65M USD increase in wages/compensation. They expect to partially offset this with 70M USD in manufacturing efficiencies.

They did not provide any phasing of the margin improvement but indicated that the first semester of 2022 will be similar to the second semester of 2021 and just in the second half of 2022 we would start to see improvements in margins.

Also, in Q1 they will close a sales-leaseback transaction for a property in Europe. They mentioned that the cash proceeds will be sufficient to close the cash flow needs for 2021. Also, they will be refinancing the 325M USD Term Loan B later in this year but depending on market conditions and the situation with COVID they may refinance the 2024 bond as well. Valuation

My valuation per share dropped from $70 per share to $60 per share. While there is a slight change in revenue and margin assumptions, the main reason was the consumption of excess cash in 2021. The consumption of this cash was mainly in working capital and it was worth $11 per share.

I assumed revenues to be closer to the lower band of the guidance. For the medium term, I believe that revenue growth will be around 8.5% supported by the growth of the EV platform and the growth of truck production. CPS is betting on trucks rather than light vehicles and I agree with this bet. Trucks use 2 to 3 times more CPS products than light vehicles and the CAGR for truck production is 9% in the medium term compared to 3% for light vehicles. Author estimates As per gross margin, I expect them to recover margins by 2027. This is supported by the restructuring efforts in the last couple of years and the change in the contracts with customers. The company is leaner than the CPS of 2017, just in 2021, they reduced headcount by 10%. As per the contracts, so far they have been able to transfer 60% of the incremental material cost to customers. I believe the relevance of CPS to its customers will help CPS obtain favourable treatment with the customers. The OEMs need a partner that can provide the expected quality anywhere in the globe, not many CPS competitors have the global platform that CPS has. So, I see it very improbable that the OEMs will allow its key supplier to enter into financial difficulties. Furthermore, giving CPS the price increases it demands won’t affect the OEMs as they already have been increasing vehicle prices to clients.

I expect SG&A to reach 9.0% of revenues, 60bps lower than the historical average. This is justified by all the restructurings performed in the past 4 years.

As per the cash flow, I expect cash […]

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