Goodyear Tire & Rubber
Quarterly profits came in at just $2 million, compared to last year's $69, but you'd never know it from the markets' reaction. Following the earnings announcement, Goodyear stock jumped 6% to end the trading day at $11.79 a share. Why? Without the restructuring charges related to previously announced plant closings, Goodyear blew away analyst estimates. It would have reported profits of $0.37 a share, compared to the $0.18 expected by Wall Street.
Raw material costs of $210 million -- 16% higher than last year -- held back the tire maker's performance. Nearly 60% of a tire's cost is related to oil, and those same costs have crippled other tire manufacturers, too. Cooper Tire & Rubber
As it tries to drive itself back from the brink of bankruptcy, Goodyear will also encounter resistance from its heavily unionized workforce. On one hand, the company will attempt to slash pay for its employees; on the other, the workers will seek more job security and assurances that plants will not be closed. Goodyear already closed a plant in Great Britain this year and announced another planned closure in New Zealand. Labor negotiations will undoubtedly be more difficult, since the company has raised its estimates for planned savings through cost-cutting. Previously, Goodyear hoped to save as much as $750 million to $1 billion, but now it wants to save at least $1 billion by 2008. That may be ambitious, but it's hardly conducive to smooth contract talks. Goodyear's steelworkers have been without a contract since the end of July.
Goodyear seems to have found the right formula to become the leading tire manufacturer, even if it suffers a drag from higher legacy costs, oil prices, and weaker demand in North America for replacement tires. As consumers adjust to higher energy costs, they are not purchasing as many of the higher-margin replacement tires as they previously had. Unit sales dropped to 54 million tires this quarter, from more than 56 million last year.
While its stock price may suffer from these factors in the short term -- the stock is down 36% this year, from its high of $19.31 a share -- Goodyear is becoming a more sound company. Some analysts have cautioned against adding to positions in Goodyear right now, citing the company's uncertain climate. But, speaking as a shareholder, I find the company's position attractive. Despite its debt, it still has more than $1.5 billion in cash, and while it's less financially secure than competitors Michelin or Bridgestone, it's no longer in danger of collapsing into bankruptcy. Instead of slamming on the brakes, investors may instead want to put the pedal to the metal.
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