Flexing the muscle behind its turnaround strategy (focusing on higher-priced products), tire maker Goodyear (NYSE:GT) reported sharply higher profits, even though sales rose less than 2% and unit shipments actually fell from the year before. In a business that's increasingly being decided by margins as well as volume, Goodyear seems to have figured out how to grip the road.
First-quarter sales came in at a tread-burning $4.86 billion, generating profits of $68 million, or $0.35 a share -- although the company recorded unit sales of 54 million, 3.4% below last year. Goodyear has been successfully marketing its higher-priced replacement tires, even though raw-material costs affected performance by as much as $185 million. Importantly, the tire maker's North American operations showed strong profitability. This segment has served as a drag on overall performance over the past few years, but this quarter demonstrated improving sales and margins. Sales were $2.2 billion, a 5% increase over 2005, while operating margins improved to 1.9% from last year's 0.5% showing.
Compare that focused strategy to automaker Ford (NYSE:F), which has implemented its second turnaround program in as many years and may face its first year of losses since 2002. Obviously, these are different situations, but it shows the value of focusing on a strategy and sticking to it.
Goodyear has decided to eliminate its non-core businesses and will concentrate on only its core competency: making tires. For example, it will shop its profitable engineered products division, and German tire maker Continental AG announced its interest in taking the business off of Goodyear's hands. The plan also includes focusing on its higher-priced, higher-margin, high-performance tires, with the less profitable lines being shifted to lower-cost Asian facilities.
Last quarter, Goodyear was surprised by the sharp 13% rise in raw material costs, which outpaced even the company's projection of 10% increases. That pothole caused Goodyear to miss estimates, which in turn caused a lemming-like response in analysts to downgrade the company. Competitor Cooper Tire & Rubber (NYSE:CTB) is experiencing many of the same problems that plague Goodyear and the rest of the tire industry, though it found itself reporting losses, in large part due to a product liability lawsuit settlement that had been far in excess of what was expected.
Yet Goodyear, Cooper, Bridgestone, and Michelin -- together, these four companies comprise 75% of the $13 billion U.S. tire market -- must confront rising raw material costs and expensive labor pacts in an otherwise tight, competitive industry. More efficient operations will allow the best to squeeze out greater profits, and that will include moving operations to China and other low-cost Asian markets.
Goodyear's increased profitability will help it address the other unique issues its faces from when it was staring bankruptcy in the face, as well as a string of financial restatements, heavy debt, and pension liabilities. That crisis seems like a fading skid mark at this juncture, and over the next few years I see the largest U.S. tire maker trading north of $20 per share, though not without a few flats along the way.
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Fool contributor Rich Duprey owns shares of Goodyear and Ford but does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
