Investment Thesis

Cooper- Standard Holdings ("COSH") is a leading supplier globally of body sealing, fluid systems and anti-vibration systems for the auto industry.  It is traded currently on the OTCBB and has recently hired bankers to consider strategic alternatives, mostly likely a sale or IPO listing.  The company is growing in all areas, has strong market positions globally, benefiting from BRIC market expansion, a strong balance sheet and in the sweet spot for stricter fuel economy and emission standards.  The company at 3.5x 2011 EV/EBITDA is valued well substantially below peer valuations of 5.6x, even though it has less capex needs as well as a listing or sale in the near future.  The main holders Silver Point, Oak Hill, Cap World, MSD, Apollo all are incentivized post the 2009 reorg to exit or get better liquidity in the stock, which I expect in the next 6 months, likely narrowing the valuation gap and yielding 45-70% upside.  

Business

Based in Novi, MI, COSH manufactures fluid handling, body sealing and anti vibration systems ("AVS") used in vehicles and light trucks developed by global OEMs, as well as for replacement markets.  COSH designs and manufacturers in the regions in which it sells, operating in 18 countries with 66 manufacturing locations and 9 design & engineering offices.  It has products in nearly all top 20 models in the US and Europe, and is the largest body sealing system provider in the world.  COSH believes it is also the 2nd largest fluid handling manufacturer and one of the largest AVS providers in North America.

From the 2010 10-K, its segments include:

Body Sealing
- Make extruded rubber and thermoplastic sealing, weather strip assemblies and encapsulated glass products to protect vehicle interiors from weather, dust and noise intrustion.   

Anti-Vibration
- Engine and body mounts, dampers, isolators, springs, stamped or cast metal products and rubber products, used to control and isolate noise and vibration in a vehicle to improve ride and handling.

Fluid Handling
- Pumps, tubes, hoses, connectors and valves used to control, sense, measure and deliver fluids and vapors throughout the vehicle.

COSH holds over 300 patents on some of its technologies and process methods.  It spends quite a bit on R&D to keep and enhance its market positions, $68.8mm in 2010 & $62.9mm in 2009, and I expect that to increase to its pre-reorg levels of $80mm+ this year and going forward.

The company has done an enviable job navigating its raw material cost volatility.  Headwinds recently for the industry were increases in rubber, oil and fabricated metal prices, but COSH has kept its gross margins intact with cost cuts, sourcing optimization and higher volumes.

According to IHS Automotive, light vehicle production in Q22011 was +3.8% in North America/Europe and expected to increase 5.6% in Q32011.

Customers

In 2010, the breakdown of sales to major customers was:
Ford 28%
GM 16%
Fiat 7%
Volkswagon/Audi 6%
Chrysler 6%
Top 5 total 63%

Renault/Nissan, Peugeot, BMW, Daimler, Porsche, Toyota, Visteon, top India/China OEMs are also customers.


Balance Sheet & Liquidity

Post reorg, COSH has $450mm 8.5% Senior Notes due 12/2018.  In addition, it has access to a $125mm ABL Facility, LIBOR+325-375, $42mm of which is outstanding as of 6/30.

 

6/30/11 Cash was $313mm, and its working capital was north of $500mm

As of 12/31/10, its pension obligations exceeded assets by $166mm, which I added to net debt.

7% cumulative preferred stock - 1.051mm shares out as of 6/30/11.  Issued as part of reorg backstop.  $131mm value as of 6/30/11, convertible into 4.381mm shares.

18.344mm shares of common out but with stock near $40, makes sense to include preferred dilution so using 22.73mm shares.

Expects $105-115mm in 2011 capex and $25-30 in tax.  D&A $120mm

Owns 47 manufacturing facilities globally, 23 in the US.  Have not done extensive analysis yet on the current value of these facilities.  

Valuation

 

Company guidance for 2011:

Revenue - $2.8-2.9mm

 

Volumes - US 13.9mm and Europe 20mm

 

Adjusted EBITDA implied - $355-370mm

Market cap with pref included:  $898mm

 

Net debt with pension included:  $354mm

 

Enterprise Value:  $1,252mm

2011 EV/EBITDA = 3.4x - 3.5x


Conservative estimate of 2011 free cash flow:

EBITDA $355mm
Int exp $40mm
Tax $30mm
Capex $115mm
FCF=$170mm, 19% yield on equity.

Net Income of $165mm assuming 15% tax rate, yielding EPS of $7.25, or 5.44x P/E

 

Comps trade at an average of 5.22x EV/2011EBITDA and 10.65 2011 P/E, per the table below:

							LTM	EV/LTM	11E	11E EV/	12E	12E EV/
Company Name	Symbol	Price	Shares	Mkt Cap	Net Debt	TEV	EBITDA	EBITDA	EBITDA	EBITDA	EBITDA	EBITDA
TRW Automotive	PRQ	$39.21	123.72	$4,850.98	$750.00	$5,600.98	$1,803.00	3.11	$1,802.00	3.11	$1,888.60	2.97
BorgWarner	BWA	69.16	109.61	7,580.63	1,150.00	8,730.63	951.40	9.18	1,072.00	8.14	1,254.60	6.96
Genuine Parts	GPC	54.21	156.76	8,497.96	(7.00)	8,490.96	921.88	9.21	1,015.86	8.36	1,082.00	7.85
Goodyeard Tire & Rubber	GT	11.83	244.36	2,890.79	4,020.00	6,910.79	1,642.00	4.21	1,810.00	3.82	2,103.00	3.29
Lear Corp	LEA	47.33	103.87	4,916.17	(980.00)	3,936.17	910.20	4.32	1,051.80	3.74	1,148.82	3.43
Tenneco Inc	TEN	31.26	60.21	1,882.07	1,130.00	3,012.07	558.00	5.40	619.80	4.86	722.09	4.17
Dana Holding	DAN	12.85	146.99	1,888.85	900.00	2,788.85	639.00	4.36	777.00	3.59	878.00	3.18
Wabco Holdings	WBC	42.39	67.17	2,847.34	9.00	2,856.34	393.00	7.27	485.20	5.89	518.80	5.51
Cooper Tire & Rubber	CTB	12.81	62.26	797.55	450.00	1,247.55	310.40	4.02	285.00	4.38	337.00	3.70
Titan International	TWI	17.89	42.12	753.51	214.00	967.51	124.00	7.80	192.60	5.02	255.60	3.79
Federal-Mogul	FDML	18.18	98.91	1,798.11	1,790.00	3,588.11	636.00	5.64	742.00	4.84	810.00	4.43
		AVG		3,518.54		$4,375.45		5.87		5.07		4.48
Cooper Standard	COSH	$39.50	22.73	$897.84	$354.00	$1,251.84	$246.00	5.09	$355.00	3.53	$430.00	2.91
										$63.57		$69.13
									Upside	61%		75%

- Listing on a major exchange, providing better liquidity, potential analyst coverage and an inline peer multiple

- Sale of company to private equity or industry buyer