European operations will be pared back as Goodyear Tire & Rubber (NYSE:GT), the largest U.S. tire manufacturer, continues to face rising raw-material and labor costs. A British tire facility and a Polish bicycle tire plant will get the axe as the company looks to China and possibly Germany to expand operations at a lower cost.
Goodyear has successfully come back from the brink of bankruptcy and straightened out an accounting mess that plagued it for, ahem, a good year. Through cost-cutting, plant closings, and divesting itself of non-core operations, the tire maker has emerged as a strong competitor that has been able to pass along higher costs by raising prices. By moving to countries with lower labor costs, Goodyear expects to save $40 million to $50 million annually; the move will cut roughly 1,500 positions. The company will take charges of as much as $115 million, with about half that amount taken in the first and second quarters of this fiscal year.
The bicycle-tire plant is the largest of Goodyear's European factories; it was acquired in the mid-1990s during a wave of privatization in Poland. Competitor Michelin acquired a stake in Stomlin, another Polish bicycle tire company, on the same day in 1995. Labor costs, however, have made manufacturing tires there unprofitable. In addition, with crude oil accounting for 60% of the cost of a tire, and with the cost of oil tripling over the last few years, continuing to manufacture there has become untenable. Tire manufacturers have been moving operations out of Europe to control such costs, and China has benefited from the migration.
Goodyear Dunlop, the British car-tire plant, was formed in 2002 in a joint venture between Goodyear and Japan's Sumitomo Rubber. Closing it will save Goodyear about $20 million a year.
Cost control and reduction has been a primary focus of Goodyear's turnaround. Last December, it sold off its farm tire unit, and the quarter before, it eliminated its engineered products division. Analysts view this latest measure positively, unlike the fourth-quarter earnings report. It included a $51 million loss, as excess cost increases hammered the progress the company had been making. Most likely, analysts will soon reverse the downgrades that followed the earnings report by issuing upgrades.
I invested in Goodyear because the company appeared to have put its past behind it and had a solid plan in place for turning itself around. That plan has thus far served the company well, and its stock has more than tripled since its nadir. While it had been up as much as fourfold from those dark times, I still think the company -- and the stock -- have a ways to go, and I ultimately see shares doubling in price from their current levels. Such a trip won't be without a few flats along the way, but Goodyear still has some good traction for growth.
For related Foolish articles:
Fool contributor Rich Duprey owns shares of Goodyear, but he does not own any of the other stocks mentioned in the article. You can see his holdings here. The Fool has a disclosure policy.
