3 Things to Watch With Goodyear Tire & Rubber

Goodyear Tire & Rubber (NYSE: GT  ) is North America's largest tire manufacturer and operates approximately 1400 tire and auto service centers worldwide. In addition, the company is involved in manufacturing and marketing chemical and natural rubber products.

Today, let's look at three things investors should be watching regarding Goodyear Tire, as they'll provide us with better insight into the company.

1. Input costs
Expenses are a worry no matter what business sector a company operates in, but raw materials costs are a big concern for tire manufacturers Goodyear and Cooper Tire & Rubber (NYSE: CTB  ) . Rubber costs account for roughly 40% of the bottom line costs of tire production, so knowing whether rubber prices are rising or falling with have huge implications on tire manufacturers' bottom lines.

The good news for both companies is it appears rubber prices are falling from their recent peak. Rubber prices are down 23% this quarter as a direct result of slowing global growth. Also, butadiene, a key component of the synthetic rubber used in tires, has fallen 13% since April. With material costs falling, both Goodyear and Cooper could be set up to trounce Wall Street's expectations in the second half of 2012.

2. International demand
Even with Goodyear being North America's largest tire manufacturer, it still relies on international sales to generate 55% of its total revenue. That means that a global slowdown in China or austerity measures that affect personal spending in Europe does have a direct impact on Goodyear's bottom line.

In Goodyear's first quarter, the company noted volume declines in all four geographic operating segments but was able to pass along hefty price increases per tire in most regions. This is why in North America total volume fell 8%, yet overall sales climbed 8%. Its Europe/Middle East/Africa (EMEA) segment wasn't nearly as lucky with revenue per tire rising 16%, yet margins still contracted by 270 basis points. If Goodyear is to turn things around and move higher, it will need margins in its EMEA segment to pick up, and it'll need better pricing power in Latin America, where revenue-per-tire rose by just 4%.

3. Understand the hand that feeds you
In addition to understanding Goodyear's input costs and where demand comes from both domestically and internationally, it's important to keep an eye on consumer demand levels for car manufacturers.

Goodyear earns a profit from its original equipment deals (OEM) with carmakers as well as aftermarket replacement sales to consumers. From an OEM standpoint, car sales in May were up dramatically over the year-ago period, with Ford (NYSE: F  ) , General Motors (NYSE: GM  ) , and Toyota Motor (NYSE: TM  ) reporting unit increases of 12.6%, 10.9%, and 87.3%, respectively. What these gains mask, however, is that total auto sales have fallen in four consecutive months, which has been a drag on tire companies' profits and projections. Understanding the strengths and weaknesses behind the hand that feeds you can go a long way in understanding how and why Goodyear sets its earnings projections up the way it does.

Foolish roundup
Now that you know what to watch for, it should be easier to analyze Goodyear Tire & Rubber's successes and pitfalls in the future, and hopefully you'll gain a competitive investing edge.

If you're still craving even more info on Goodyear Tire & Rubber, I would recommend adding the stock to your free and personalized Watchlist so you can keep up on all of the latest news surrounding the company.

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Fool contributor Sean Williams has no material interest in any of the companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors, as well as creating a synthetic long position in Ford. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy that always keeps its feet on the pavement.


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