Goodyear Illustrates What Oil Companies Might Expect

Five key quotes from Goodyear Tire & Rubber Co. Q3’08 conference call: (GT)

Consumers are driving less, buying fewer tires, looking for cheaper, more fuel efficient options:

Consumers are driving less and consuming less gas. In the U.S.... miles driven have declined approximately 3% over the past nine months. And we are seeing similar trends in Europe

Consumer preferences may… be changing. We are seeing some evidence of drawing strength in mid-tier product lines and more consumers interested in the fuel efficiency of their tires.

Consumers are clearly buying fewer tires. [However,] while tire purchases can be delayed, they can’t be postponed indefinitely… We’ve seen this in previous recessions or near recessions in the U.S. And we’ve always gotten a bounce back in terms of demand within a year or two. You can only defer so long.

Currencies:

If you assume that the dollar remains strong, then that’s going to be something that’s going to make it tougher for us not easier.

Commodities:

Since the second quarter call, we’ve seen oil prices and natural rubber both drop by about 45%. Although we’ve seen synthetic rubber prices increase nearly 10% over this time frame, it too has begun to decline more recently. Our raw materials impact will also be affected by currency movement as our overseas operations in Europe, Brazil and elsewhere have not benefited from the same reduction in raws when denominated in their local currency.

Pensions in trouble:

With our U.S. pension portfolio at about $4.5 billion starting the year, the global market volatility is taking a toll with September year-to-date returns down 17% and a further decline in October. While this impact will be offset partially by higher discount rates, there will be a significant impact on our unfunded pension obligation at year end and on pension expense next year… There would be a significant increase in our cash funding obligation beginning in 2010.

Hunkering down: 

[We’ve] completed plant closures in Tyler where we’ve closed the mixing center as well as the closure of our last Australian tire manufacturing plant at year end… Elsewhere we’ve implemented hiring freezes, eliminated non-essential travel, and cut back non-essential marketing expenses.

 

Comments

[happycajun:]

So, where is the anaylsis supporting the conclusion that a tire manufacturer's financial and operating experience could in any way be a predictor for "Oil Companies?" (Whatever in the hell an "Oil Company" is - is this a vertically integrated major; or an upstream independant - if so, one focused primarily on domestic natural gas, or domestic/international oil?). Did Goodyear hedge its forward production at higher prices than current market? I hope your knowledge of the rubber industry is more complete than your knowledge of the Oil and Gas industry.

2008 Nov 04 08:24 AM

[Ferdinand E...:]

I'll go along with this one. It tells me something about what is going to happen in the international macroeconomy in the coming months, or even longer. In fact it might also say something about what is going to happen in the election today.

2008 Nov 04 09:44 AM

[Steven Ward:]

In Europe, in the second quarter of 07, 41,000 trucks were sold across all of Europe. For the second quarter in 2008 only 108 trucks were sold.

Basically, dropping to zero. I've never seen anything like that. Yes, less tires.

2008 Nov 04 12:54 PM

[NOWHEREMAN:]

Think in terms of all of the Heavy Duty tires used in the mining industry. Those really big ones, the work and loads involved used to chew them up so rapidly that replacement tires were often ordered upon delivery, no more.

2008 Nov 04 04:44 PM

[Ames Tiedeman:]

GT looks like an inexpensive proposition if one has more than 5 minutes. This is only the 3rd time since 1991 that the stock has been this cheap. 80% of their tire sales are to the after market. They are the third largest maker of tires in the world. Their cash is equal to their debt.

2008 Nov 24 09:10 PM

[Ames Tiedeman:]

I like GT. This is the 3rd time in 17 years to see this stock this cheap. Despite their pension problems, the tire business is not going away anytime soon...

2008 Dec 13 09:51 AM