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Leading U.S vehicle manufacturers have been struggling in Europe due to the economic slowdown there. The latest figures have auto sales off 8.5% to start 2013. Due to this, the tire industry in North America and Europe is also looking at a rough year, despite what was an excellent 2012 for U.S. sales.

Goodyear (GT) posted breakeven results for its fourth quarter, down from a profit of $18 million in the same period in 2011 and has reduced its outlook due to weak demand of vehicles in the debt ridden Europe. The company's net sales fell by 11% to $5.05 billion, significantly lower than analysts' estimate of $5.34 billion. The global tire volumes for the quarter fell by 7% to 40 million units due to lower European sales. The company narrowly avoided a loss due to a dip in raw material costs and gains from the Union City, Tenn., plant closure.

The company now expects to earn an annual operating income of $1.4 billion to $1.5 billion down from previous estimates of $1.6 billion. This is no surprise as players like Ford (F) and General Motors (GM) have been struggling to stay relevant in a market dominated by Volkswagen (VLAKY), which has pushed its market share in Europe to over 24%. Goodyear's sales and volumes dropped in all of its markets, except Asia Pacific, where sales volume increased by 6% to 5.2 million tire units.

Goodyear

Rev Change

Rev

Vol Change

North America

-10%

$2.31B

-5%

EMEA*

-16%

$1.60B

-15%

Latin America

-9%

$541M

0%

Asia Pacific

-0.5%

$588M

+6%

While Goodyear dominates in North America, the France-based Michelin (MGDDF) is the market leader in Europe. While Michelin reported a 7% increase in annual profits, it is not looking at any growth in the current year. Michelin's net sales increased by 3.6% to $28.73 billion while its income increased to $2.1 billion but it missed estimates. Overall, like Goodyear, Michelin's volumes also dropped by 6.4%; its growth came largely from specialty business.

Michelin is aiming to expand beyond Europe to reduce its exposure to its home market which is expected to contract by 5% this year. The company, despite the headwinds, is sticking to its plan of investing between $2.14 billion and $2.94 billion annually in the next two years and has set a target to achieve operating income of $3.34 billion (€2.5 billion) by 2015.

However, despite the gloomy guidance given by Goodyear and Michelin, the truth may be even uglier than they are forecasting:

a) Goodyear's reduced operating income target would still be a 12% increase from 2012. But in 2013, Goodyear will reduce its exposure to Europe through production cuts and will exit the farm tire market completely in the EMEA region.

b) Michelin is still heavily exposed to Europe where the auto-market should contract in 2013.

c) Expecting the U.S. to come through with an expansion on last year's sales with a slumping European economy is nonsensical, despite massive easing by the Federal Reserve.

Looking at Goodyear trading at a multiple of 19 in a low growth market and a stock market pushing higher on weak fundamentals and soaring monetary statistics, one has to wonder that if the Fed does succeed in reflating the credit markets, which at this point looks like a dubious assumption, how long will it last before bursting like the last one leaving huge car and car part inventories in its wake. The forecasts from these companies are trying to tell us something. Maybe we should listen.

Goodyear

Michelin**

Stock 6M Performance

29.1%

14.4%

P/E

19.0

7.3

EPS

0.74

12.24

ROA

4.1%

6.9%

ROE

17.0%

19.8%

Source: Tire Maker Expects Difficult 2013