Earlier this year, I penned an article taking to task the market's reaction to Deutsche Bank's downgrade of Goodyear Tire & Rubber (NYSE:GT). While I wrote that the story was a non-event, the company's stock still dropped nearly 10% on the "news." Now yesterday, KeyBanc Capital Markets raised its rating on the tire maker, from "hold" to "buy," and the stock surged some 7%. Even though it's a positive story, I still maintain that investors shouldn't care.
At the time of the downgrade, the Deutsche Bank analyst had cited Goodyear's massive debt load (its debt-to-equity ratio -- the amount of debt it has for each dollar of shareholder equity -- stands at an astronomical 107-to-1), costly pension obligations, and an inability to cut costs through layoffs. My argument then was that although each of those points was accurate, the company had been taking the necessary steps to restructure its loans and that, furthermore, cutting costs through means other than layoffs was actually a boon to employee morale. Goodyear's pension plan is problematic, but the company isn't alone: Many old-line businesses have costly pension plans that need to be addressed. With Goodyear able to raise its cash balances and increase prices on its products, it is slowly pushing itself into a more financially secure position.
Yesterday's analyst opinion was that the price hikes, improved sales of more expensive tires, and the restructuring of debt to eliminate short-term liquidity issues made the possibility of a more profitable 2005 all the more likely. I agree with the sentiment, but it was nothing that hasn't been in full view for a while, and it shouldn't have affected the stock price so dramatically.
Investors need to constantly ward off the temptation to trade in and out of stocks based on the very short-term horizons of professional analysts. We need to look at our ownership of these businesses with an owner's eye: What's the business, how's it doing, and can management continue doing things right in the future?
Goodyear has been doing things right for some time now. In particular, its ability to raise prices on products have matched the increases at Cooper Tire & Rubber (NYSE:CTB) and Bridgestone. Lately, though, those increases have been barely enough to cover the additional costs associated with raw materials such as rubber and oil. Goodyear has raised tire prices five times since 2003. It has introduced new products, too, that have found favor with the Big Three auto companies -- Ford (NYSE:F), General Motors (NYSE:GM), and DaimlerChrysler (NYSE:DCX). And the company's big tires, the ones used on heavy machinery and equipment and costing tens of thousands of dollars each, are already allocated for the rest of the year.
There's still plenty of risk associated with an investment in Goodyear, for many of the reasons the analysts have highlighted. Yet whether the particular recommendation is to buy, sell, or hold, investors should ignore the chatter and focus on whether the company's rubber is hitting the pavement.
And right now, there is no slippery feel to Goodyear's traction.
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Fool contributor Rich Duprey owns shares of Goodyear and Ford but none of the other stocks mentioned in this article. The Motley Fool has a disclosure policy.
