Goodyear Puts the Pedal to the Metal

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Where the heck did that come from?

Since restructuring its business in 2009 amid arguably the worst industry downturn in auto history, Goodyear Tire & Rubber (NYSE: GT  ) yesterday surprised everyone by reporting record quarterly revenue of $5.6 billion. The company's quarterly profit of $0.65, excluding items, also left consensus estimates of $0.27 in the dust. In short, the company nailed it, so let's take a look at why growth was so strong.

The main driver of the company's growth was its North American business segment, which saw an 18% increase in total revenue to $2.4 billion despite a 5% drop in overall tire volume. What this means for Goodyear's bottom line is a significantly juicier gross margin and thus a much higher-than-expected quarterly profit.

Another often overlooked implication of the tire business is the greater amount of used cars now on the road. With prices on used cars healthier than they've been in a long time, dealerships like Lithia Motors (NYSE: LAD  ) and Sonic Automotive (NYSE: SAH  ) are looking to cash in. One way Goodyear may capitalize on that trend is through increased tire volume. Trust me, it's great getting premium tires on a brand new vehicle, but with used cars lasting longer every year, there are big margins to be made for Goodyear in the used-car market. Perhaps that's one reason Goodyear claims it's on track to turn $1.6 billion in operating income by 2013.

Not everything is as cut and dried as it seems, though, because it appears material costs are poised to take a major bite out of Goodyear's bottom line during the second half of the year. The company anticipates that raw-material costs are expected to rise by more than 30% for the rest of the year versus prior estimates of a 25%-30% jump in costs.

At first, traders pumped Goodyear's stock up above $18 yesterday, but shares came crashing down promptly to finish below $16 on worries of rising costs. So what's an investor to do?

I think you'd be crazy to overlook just how far Goodyear, and the entire tire industry, has come since the lows of 2009. Cooper Tire & Rubber (NYSE: CTB  ) and Goodyear are both trading at single-digit forward P/Es and could for their own unique reasons make solid investments. Cooper pays out a dividend and has a significantly better cash position than Goodyear. On the other hand, Goodyear currently has better earnings momentum and appears cheaper when comparing PEG ratios. Either way, I don't think you could go wrong owning either over the next few years.

When the rubber meets the road, are you a buyer of Goodyear here? Share your thoughts in the comments section below and consider adding Goodyear Tire & Rubber and Cooper Tire & Rubber to your watchlist to keep up on the latest news in the tire industry.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong  Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that burns candles, not rubber.

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  • Report this Comment On August 01, 2011, at 2:08 PM, 0512neal wrote:

    Annual data showed that Goodyear lost 77, 375 and 216 million dollards respectively in 2008, 2009 and 2010. Goodyear made some profits in the first two quarters of 2011 and then warned that 2nd half will not be as good as the first half. Sure Goodyear puts the pedal to the metal in the first half of 2011 and the pedal cannot go any further. I am afraid that Goodyear will put the brake to the metal during the second half of 2011.

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