What happened
Shares of tire company Goodyear (GT 0.08%) surged by more than 17% in the week as of the Friday open. The move comes as a consequence of positive sentiment in the run-up to its third-quarter earnings report and then the report's release on Friday morning.
The results were excellent and served to dispel fears that a combination of rising raw material prices and slowing vehicle production would hurt the company's earnings and throw its integration of Cooper Tires off course.
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The reverse happened. Goodyear's sales improved 42% on a year-over-year basis in the third quarter to $4.2 billion. The results include a contribution from Cooper Tires, but even without it, sales would have risen 16%.
Moreover, the company managed to more than offset raw material cost increases by raising prices for the second quarter running. In the second quarter, pricing and sales mix impacts exceeded raw material costs by $135 million, and Goodyear did it again in the third quarter with a $165 million increase. In addition, management expects the price and sales mix versus cost to be positive in the fourth quarter.
There was some excellent news on the Cooper Tires integration, where management raised its forecast for cost synergy generation to $250 million from an original target of just $165 million.
So what
The results and positive traction with integrating Cooper Tires highlight the investment case for buying Goodyear stock. The tire industry is relatively mature, so Goodyear's acquisition of Cooper Tires makes perfect sense. It will expand margins and give Goodyear growth in key end markets such as the U.S. tire replacement market and China's original equipment market.
Meanwhile, Goodyear will build the scale necessary to generate better margin performance while at the same time cutting shared costs.
Now what
Raw material costs are rising, but so far, Goodyear has been able to more than offset them, and investors will be hoping management achieves its aim of doing so in the fourth quarter as well. Thinking longer-term, the Cooper Tires deal looks like it's come at precisely the right time to benefit from solid replacement demand and, hopefully, a recovery in vehicle production next year. As a result, Goodyear remains a good option for value investors.
