The toll that's being exacted on tire manufacturers took down another player yesterday, when Bridgestone (OTC BB: BRDCY.PK), the Japanese maker of its eponymous line of tires along with the well-known Firestone brand, reported that its profits fell 68% because of the rising cost of raw materials.
In recent days, American tire makers Goodyear (NYSE:GT) and Cooper Tire & Rubber (NYSE:CTB) each said that high oil and rubber prices slammed their profits. Oil makes up approximately 60% of the cost of a tire, and record-high prices have let the air out of the profits at all of the tire makers. Goodyear reported that raw-material costs were 16% higher than they were last year, and with Cooper saying it expects commodity prices to continue to rise 17% to 20% for the remainder of the year, tire makers will still be negotiating a very bumpy road.
Bridgestone also faces some concerns particular to itself. Last year, it had received a one-time influx of $730 million from a pension-related reimbursement that boosted profits, but plant closures in the U.S. this year hit the company with a $137 million charge. And last month, it said it would try to remove from the road the remaining tires related to the disastrous Firestone debacle, in which the tires were implicated in the deaths and injuries of hundreds of people in 2000. The problem ended the company's decades-old U.S. relationship with Ford (NYSE:F), although Bridgestone says the car manufacturer does continue to use Bridgestone tires on various car models outside the United States. The company has paid out more than $1 billion for the recall and to settle lawsuits over the years. Of the 6.5 million troublesome tires estimated to be on the road at the time, Bridgestone says that 6.3 million have been recovered.
Tires get flatter
The worsening outlook for tire makers also flattened one manufacturer's plans to go public, as Italian manufacturer Pirelli canceled plans to raise $1 billion last month. That put into question the conglomerate's ability to remain profitable; it had hoped to use the proceeds from the sale to buy out an Italian telecom company that it already has a 58% stake in. It ultimately sold a 39% stake in its tire division to a group of bankers with the provision that it can buy back the shares if it doesn't go public.
German tire maker Continental seemingly has defied the pressures of other manufacturers; it expects 2006 sales and earnings to exceed last year's mark, though the company realizes more than 60% of its revenues from operations other than tires. Even so, however, it announced an 18% decline in second-quarter profits. The company said the second half of the year should be better since, seasonally, it is a stronger time for sales.
Considering the turmoil that oil, rubber, and other commodity costs have played with tire makers recently, it may seem I was a little premature a few months ago in saying the industry was one that investors should consider. Yet the fact remains that while profits have been harder to find than a tread on a bald tire, sales have generally been robust, with most manufacturers reporting double-digit increases. Many tire makers are closing down their least profitable businesses and focusing on the segments where they can get the best blowout results.
Yet not everyone is profitable in the same areas. For example, Continental reported that its light-truck tire division was particularly scored by rising costs, with that segment's profits falling by 27% from last year even as sales increased by nearly 8%. Bridgestone, on the other hand, saw only a slight decrease in sales. Overall, the industry experienced about a 7% reduction in such sales.
Conversely, Michelin (OTC BB: MGDDF.PK) said heavy-truck tire sales jumped nearly 9% in the first half, while the Rubber Manufacturers Association predicts a modest 5% increase in commercial-truck tires for the year. Goodyear is exiting some of its private-label tire business altogether, and Chinese imports are much cheaper at all levels -- their sales have increased 47% over last year.
Which tires to pump
I find Goodyear, even with its more challenging financial picture, to be a good bet because it has restructured itself to essentially do one thing: build tires, and only the more profitable ones at that.
I think these companies are in an attractive position for investors, because each plays to its strengths. And for investors with the courage to invest when an industry is on the skids, it may mean greater profits for their portfolios down the road.
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Fool contributor Rich Duprey owns shares of Goodyear and Ford but does not own any of the other stocks mentioned in this article. You can see his holdings for yourself. The Motley Fool has a disclosure policy.
