When the world's largest tire company reported last week that its third-quarter earnings marked its best showing in seven years, it seemed to be the exception that proved the rule. Warren Buffett doesn't invest in turnaround situations because he considers them rarely successful; Peter Lynch, on the other hand, sees viable opportunities in turnarounds. The difference between the two approaches can be summed up like this: Turnarounds rarely turn around, but sometimes they do.
Goodyear has also been jettisoning operations that fall outside its core strengths. As it attempts to save $1 billion by 2008, it has reduced capacity by as much as 12% through plant closings, and it's contemplating the sale of its engineered products division. Though that segment continued to produce record sales for the quarter, growing 7% to $407 million, it was one of the few divisions not reporting higher profit margins; they fell by 26% because of higher costs.
The company was likely proudest of its North American division, which composed the largest segment with more than $2.3 billion in sales -- up 5% year over year. Its margins doubled to 2.4% even as tire units remained constant, reflecting the higher-priced products it was able to push. Hurricanes Katrina and Rita caused temporary production cuts and a disruption in the division's supply of raw materials; while its tire-making plants are back to normal production levels, the hurricanes swiped about $0.05 a share from the results.
Goodyear's good fortune seems to come at the expense of competitors such as Cooper Tire & Rubber
Though its fourth-quarter results aren't expected to be so dramatic, Goodyear remains on a roll for a record year.
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