Goodyear Tire & Rubber (NYSE:GT), eager to share some good news with investors following months of downbeat releases, today tried to move the focus away from ongoing trouble with restated earnings and European accounting problems and onto something more fundamental: raw materials prices. New proprietary synthetic rubbers, the company said, may help the company reduce its reliance on natural rubber significantly over the next five years.
If this pans out, it would indeed be a significant development for Goodyear, which in recent years has met nearly half its rubber needs with the natural stuff purchased on the world market. A great deal of natural rubber, meanwhile, comes from Asia. (Synthetic rubbers produced at corporate-run plants make up most of the balance, though, the company frequently uses other suppliers outside North America.)
The price of natural rubber, however, fluctuates more than Goodyear would like. As a result, it's worked to develop more cost-effective synthetics -- and doing so would certainly help justify the hundreds of millions of dollars Goodyear spends on research and development each year. Investors seemed to like the sound of the announcement, and the company's shares rose more than 6% in early trading.
It's easy to see why. Heading into 2003, the company said it expected rising oil and natural rubber prices to boost raw materials during the year, and that's just what happened. Through the first nine months of last year -- more recent detailed information isn't available because the company has delayed its 10-K filing -- rising raw materials costs were the main factor behind Goodyear's increased cost of goods sold and narrower gross margins.
Meanwhile, a tough global tire market makes it difficult for Goodyear to combat cost increases with price increases for its own goods. Any steps a company can take to control costs should be welcomed by investors who've seen their shares outpace the S&P 500 over the last 12 months, but have nonetheless undergone something the company can't appreciate, a bumpy ride.
Each month, Tom Gardner uncovers small, undervalued companies in Motley Fool Hidden Gems . You can take a free, 30-day trial to see which firms he's found lately.
Fool contributor Dave Marino-Nachison changed a tire on his car yesterday, but he doesn't own shares of Goodyear.
