Tire Makers Spin in Different Directions

The headlines looked similar for tire makers Goodyear (NYSE: GT) and Cooper Tire & Rubber (NYSE: CTB), with both companies swinging to a third-quarter profit. The market's reaction couldn't have been any different, though. Goodyear's stock price initially rose shortly after its release; Cooper's shares tumbled 15% on Tuesday. After another couple of days of rough market terrain, Cooper's shares are now off 24% from Monday's close.

In a world of scary stocks, it looks like Cooper should have been the one pegged as wearing the Grim Reaper mask. Why the discrepancy in market reaction?

Both companies had a series of one-time items that improved their earnings picture, and both suffer from rising oil prices. Petroleum is key to tire making and accounts for 60% of the products used to make tires. As of late 2005, Goodyear reported that a $1-per-gallon boost in the price of oil cost it $20 million. Over the past year, crude oil prices have risen more than 70%, from $55 a barrel to more than $90 a barrel now.

Cooper said that rising raw material expenses cost it $6 million for the quarter, and that they represent a "risk" for the company going forward as they continue to increase. Couple that with "unfavorable plant conditions," which caused another $10 million in expenses, and Cooper ended up posting earnings from continuing operations of $17.8 million, or $0.29 per share. That was probably the greater sin, as analysts had forecast it to earn $0.30 a stub.

Contrast that with Goodyear, which reported gains from the sale of its engineered products division and which saw sales from the important North American market drop 6% from a year ago. However, overall sales increased 3% year over year to $5.06 billion, and sales of higher-margin premium tires helped it carve out greater market share. Without the one-time gains and charges, Goodyear earned $0.70 a share, compared with analyst expectations of just $0.53 a share.

The North American truck market remains extremely soft, which had an impact on tire makers Michelin and Continental, which also missed analyst expectations. Although there are pockets of optimism on car sales, the U.S. market remains caught between the credit crunch and the housing crisis. Ford (NYSE: F), for example, recently reported a 9% drop in U.S. sales. That means the tire makers have to look elsewhere for growth opportunities.

Yet where one tire maker talks about finding "risk" in the future and the other reports greater efficiencies realized from a turnaround plan, it's not so difficult to see why the markets have reacted as they did. Still, both face challenges as oil continues to go up and they continue to sport premium valuations. Investors should be wary.