The largest tire maker in the U.S. has decided to play to its strengths. Goodyear Tire & Rubber (NYSE:GT) is continuing to restructure its business and is considering the sale of its profitable engineered products division. It's also closing an undetermined number of factories. The goal is to save up to $1 billion by 2008 by reducing capacity by as much as 12% through the plant closures.
Focusing on your strengths is itself often seen as a sign of strength in business. Few companies can effectively run a diversified line of enterprises like Warren Buffett does at Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb), which counts among its subsidiaries GEICO Auto Insurance, See's Candies, Fruit of the Loom underwear, and ice cream royalty Dairy Queen, among many others.
When diversification doesn't pan out as expected, investing legend Peter Lynch called it "di-worse-ification" and generally shied away from companies that went too far afield to make acquisitions.
Yet Buffett is not alone in being successful at diversity. General Electric (NYSE:GE) has managed a vast empire of assorted businesses. On a much smaller scale, Otter Tail (NASDAQ:OTTR) operates a power company, plastic pipe manufacturers, a wind-power tower maker, medical imaging companies, and even dehydrated potatoes!
Goodyear hasn't attempted to operate vastly unrelated businesses. Most of its divisions have at least been rubber- and tire-related. The engineered products divisions being contemplated for sale make rubber products, including conveyor belts and power transmission products. Its chemical products segment, rolled into the North American tire segment earlier this year, makes synthetic rubber, rubber lattices, and resins, which it sells to its tire facilities. The sale of its farm tire segment is pending.
Engineered products recorded sales of $1.5 billion in 2004, up 23% over 2003, employing more than 7,000 people in 30 facilities worldwide. As part of its restructuring, Goodyear has been reducing its workforce, cutting more than 6,500 jobs over the past three years, while at the same time moving some production to lower-cost China, where tire production is primed for growth. So even though the division has been performing admirably, it's considered a non-core segment removed from its primary consumer and commercial tire business.
The company is targeting operating margins of 5% in North America and will close the highest-cost, lowest-profit facilities in an effort to achieve those goals. Also, Goodyear will be focusing on its higher-margin products. When it reported second-quarter earnings last month, the company said it doubled profits to $69 million, or $0.34 a share, handily beating analyst estimates on the strength of selling more expensive products. As it has firmed its financial footing, it has been able to match price increases from competitors Michelin, Continental, and Cooper Tire & Rubber (NYSE:CTB).
Investors apparently liked that cost-savings news and boosted Goodyear's shares some 3% last week. Over the past year, the tire maker's stock has risen 46% and has more than doubled over the past two years. That's a pretty sharp U-turn for what was once a financial basket case and a strong reminder of the value of playing to one's strength.
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Otter Tail is a Motley Fool Hidden Gems recommendation.
Fool contributor Rich Duprey owns shares in Goodyear and wishes he owned Berkshire Hathaway. He does not own any of the other stocks mentioned in this article. The Motley Fool has an ironclad disclosure policy.
