Goodyear Gets Traction

Successful companies can command premium prices for their products. Many can even raise prices despite periods of increasing costs for their raw materials. Such is the case with Goodyear Tire & Rubber (NYSE: GT  ) , a former financial basket case that is creating profitable opportunities for investors while it remains in the process of turning itself around.

Five years ago, Goodyear was in the throes of a financial meltdown. Sales were off, profits cratered, factories closed, and employees got laid off. Its products were the subject of investigations, the stock was removed from the Dow, it eliminated its dividend, and relations with distributors were a shambles. The storied 107-year-old company seemed to be in an uncontrolled skid toward a precipice. But then came a new CEO with a turnaround plan, and today we're talking about a very different Goodyear from that one.

The largest U.S. tire manufacturer released an earnings report late last week that cheered investors' hearts. Sales rose more than 10% year over year, with Goodyear's European, Asian, and Latin American segments carrying the ball and moving it pretty far down the field, even as the important North American market remained flat. Even the rising cost of rubber and steel did little to dent the tire maker's progress, though those increases will continue to put a drag on performance for the rest of the year.

From an inventory standpoint, Goodyear's third quarter promises to be another good one. As Fool Seth Jayson most recently pointed out, taking stock of the components that make up inventory can give investors insight into potential future growth. Growth in raw materials and work in progress that outstrips sales are indications that the company anticipates greater sales ahead. You also want to see sales remain ahead of finished products. Here are Goodyear's latest numbers, with dollar figures in millions:

	Q2 2005	Q2 2004	% Change
Raw Materials	$617	$486	27%
Work in Progress	$146	$143	2.1%
Finished Product	$2,157	$2,054	5%
Total Inventory	$2,290	$2,682	8.9%
Sales	$4,992	$4,519	10.5%

Sales are well ahead of inventory growth overall, but more importantly, sales are ahead of finished product. With the hefty increase in raw materials, we can certainly see that Goodyear's costs have been on the rise. But that simply indicates that the company anticipates turning those raw materials into tires in the future, and we can expect to see strong sales down the road.

Profits also doubled from last year, rising to $69 million, or $0.34 a share, from $30 million, or $0.17 per share. While sales were on the rise overseas, the company made gains primarily from the company's ability to increase prices while also selling more expensive products. Its competitors were in a similar situation. French tire maker Michelin was able to post profit gains in the face of flat sales by being able to increase prices, while Germany's Continental posted strong profits, too. Both, however, were affected by flat European sales, whereas Goodyear was able to post sales growth of 11% there.

U.S. competitors reported mixed results. Titan International (NYSE: TWI  ) reported an 11% sales increase and a 33% jump in adjusted net income, while Bandag (NYSE: BDG  ) , a Motley Fool Hidden Gems Watch List selection, reported results that were less than what Wall Street expected, though prospects for future growth seem good. Cooper Tire & Rubber (NYSE: CTB  ) reported flat sales and an earnings loss for the quarter.

All of that news makes Goodyear's results shine that much brighter. Rising sales, rising profits, and an expansion in markets where others are finding difficulties show that the turnaround is well in hand. The company can command higher prices to offset its rising costs, and its more expensive specialty products are finding traction with customers.

Even though some analysts think Goodyear's stock has overheated in recent weeks, rising some 18% in the past month alone, investors should think long-term and see that where the rubber meets the road, this tire maker still has plenty of deep tread.

Related Foolishness:

• Ignore the good mileage a company can get from analyst upgrades.
• Similarly, ignore the gloom if those same analysts issue a downgrade.
• Investors should instead focus on the business of making green.

Fool contributor Rich Duprey owns shares of Goodyear but does not own any of the other stocks mentioned in this article. The Motley Fool has a disclosure policy.