Thesis: Cooper-Standard (NYSE: CPS) is an auto parts supplier focused on sealing systems, fuel/brake delivery, and fluid transfer systems. The company was severely impacted by the downturn in new car volumes from 2018 to 2022 due to chip shortages, with revenues declining from $3.8 billion in 2017 to $2.3 billion in 2021. However, revenue has begun to rebound, reaching $2.8 billion in sales for 2023. In my view, CPS is just at the starting line; as car volumes revert to normalized levels, operating leverage will be significant, as detailed in the valuation section.
Thesis is based upon:
Pent-up demand and an aging vehicle fleet: Combined with increased chip inflows, these factors are driving the rebound in new car production. The average car age is 12.5 years, marking an all-time high. As chip supply improves, Original Equipment Manufacturers (OEMs) are expected to aggressively compete for market share.
Significant operating leverage: Cooper-Standard’s business model benefits from high fixed costs, suggesting that even a modest revenue recovery can lead to exponential EPS growth.
Strong competitive position: The company has longstanding relationships with all major OEMs, holds the top position in sealing systems, and is ranked second in brake/fuel delivery.
Valuation: If industry volumes revert to normalized levels, Cooper-Standard should achieve their normalized operating numbers. In 2017, …