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Goodyear Tire & Rubber Company (GT) showed a 70% fall in profit to $32 million or 13 cents per share (excluding special items) in the third quarter of 2010 from $105 million or 45 cents per share (excluding special items) in the same quarter of 2009. However, the company has managed to outperform the Zacks Consensus Estimate of 10 cents per share during the quarter.

The decline in profit was primarily attributable to higher raw material costs and increased selling, administrative and general expenses. The company’s cost of goods sold rose 17% to $4.12 billion, while selling, administrative and general expenses increased 4% to $640 million.

Sales during the quarter grew 13% to $4.96 billion, higher than the Zacks Consensus Estimate by $4.85 billion. It was supported by a 6% increase in tire volume to 47.7 million units, which positively affected sales by $211 million. Sales and tire unit volumes during the quarter were the highest in 2 years.

Apart from unit volumes, sales were favorably affected by improvements in price/product mix that led revenue per tire to increase by 8% during the quarter, excluding the foreign currency translation effects. Sales were also benefited from higher sales in other tire-related businesses, primarily third-party chemical sales in North America. However, it was negatively affected by $88 million due to unfavorable foreign currency translation effects.

Goodyear’s segment operating income dipped to $234 million in the quarter, down $41 million from $275 million in the year-ago quarter. This was attributable to $381 million in net higher raw material costs ($412 million before raw material cost reduction actions) and negative impact of $20 million due to unfavorable foreign currency translation effects that more than offset the benefit of $252 million due to improved price/product mix and of $125 million due to higher volume (including unabsorbed overhead recovery).

Segment Details

Sales in the North American Tire segment appreciated 17% to $2.18 billion, highest since the third quarter of 2008, led by a 5% increase in tire unit volume, better price/product mix and market share gains in the consumer replacement business. Sales were also favorably impacted by $143 million due to higher sales in other tire-related businesses, primarily third-party chemical sales.

Unit sales of original equipment manufacturers (OEMs) tires gained 12% and of replacement tires 3%. The segment’s operating income increased by $3 million to $5 million, owing to improved price/product mix, higher sales and production volumes as well as decreased pension expense and benefits from cost reduction actions. However, these were mostly offset by $148 million of higher raw material costs.

Sales in the Europe, Middle East and Africa Tire segment inched up 7% to $1.7 billion (highest in 2 years as well) on the back of a 7% rise in tire unit volume and favorable price and product mix. Unit sales of OEM tires increased 11% while replacement tire shipments rose 6%. Operating income in the segment reduced $29 million to $77 million due to the same reasons explained above.

Sales in the Latin American Tire segment escalated 17% to $569 million as tire unit volume increased 4% and price and product mix became strong. OEM unit volume rose 11% while replacement tire unit shipments went up only 1%.

Operating income in the segment fell $4 million to $ $95 million due to a negative impact of $24 million related to currency devaluation in Venezuela that more than offset the strong volume and price/product mix in Brazil and other markets outside Venezuela.

Sales in the Asia-Pacific Tire segment went up 14% to $521 million, driven by an 8% increase in tire unit volume. Unit sales of OEM tires improved 15% and of replacement tire shipments increased marginally by 3%. Operating income in the segment declined $11 million to $57 million due to the same reasons explained above.

Financials

Goodyear had cash and cash equivalents of $1.67 billion as of September 30, 2010, a decline from $1.92 billion as of December 31, 2009. Long-term debt and capital leases were $4.71 billion as of September 30, 2010. Long-term debt (including capital leases)-to-capitalization ratio remains unchanged at 85% as of the above date compared with the period ended December 31, 2009.

Our Call

We are optimistic about Goodyear’s cost-saving actions. The company has succeeded in achieving cost reductions of $2.5 billion by 2009 and has targeted an additional $1 billion of gross savings by 2012. In addition, the company will benefit from its focus in the emerging markets of Latin America, Eastern Europe and Asia.

However, Goodyear faces pricing pressure from OEMs due to weak industry demand. Further, its highly-leveraged balance sheet is worrisome. As a result, we continue to recommend the shares of the company as Zacks #3 rank (Hold) in the short term (1–3 months) and Neutral in the long term (6+ months).

Source: Goodyear Beats but Profits Fall Due to Higher Raw Material Costs