Cooper Standard ($CPS): Sealing the Deal on a Comeback Story
Can This Auto Supplier's Bonds (14% YTW) Outperform as Margins Rev Up?
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This week, I’ll be reviewing Cooper Standard, a leading automotive supplier specializing in sealing and fluid handling systems. The company has over $1 billion of highly fragmented debt, split across 1L, 3L, and unsecured notes. In particular, the company’s 3L notes currently trade at ~82 / ~14% YTW, reflecting both the risks and potential upside in this name.
While CPS has made strides in improving its operations and margins since the pandemic-induced auto industry downturn, it still faces challenges including high leverage, inflationary pressures, and the ongoing transition to EVs. In this post, I’ll examine the company’s business model, recent financial performance, and assess whether its bonds offer an attractive risk-adjusted return at current levels.
Let’s dive in.
Situation Overview:
Cooper-Standard Holdings Inc. (NYSE:CPS) is a global supplier of sealing and fluid handling systems for the automotive industry. The company holds the #1 global market share in sealing systems (helps protect vehicle interiors from weather/noise) and the #2 position in fluid handling systems (helps manage transfer of fluids and vapors for brake, fuel, and thermal management).
The company’s operations span 21 countries across 128 facilities with automotive OEMs accounting for ~85% of sales. This extensive global footprint, combined with its strong relationships with major automakers, make CPS a key player in the global automative industry.
Historical Industry Dynamics
The global automotive parts industry is highly cyclical, characterized by intense competition, rapid technological changes, and significant exposure to global macro factors. This inherent industry volatility has helped shape CPS’s historical financial performance as well as current capitalization.
The company’s resilience was tested in 2009 when it filed for bankruptcy, only to emerge in 2010 with renewed investor backing. CPS then rode the wave of global vehicle production growth, peaking at 97 million units in 2017. However, the subsequent years saw a stark reversal. From 2017 to 2020, vehicle production plummeted by 20% to 78 million units, with a particularly sharp 16% y/y decline in 2020 due to COVID-19 disruptions and semiconductor shortages.