CTB Cooper Tire and Rubber Co

Goodyear Tire & Rubber Company (GT) saw a profit of $159 million or 65 cents per share (excluding special items) in the second quarter of the year, which was more then fivefold from $31 million or 12 cents per share (excluding special items) in the same quarter a year ago.

The profit significantly exceeded the Zacks Consensus Estimate of 27 cents per share. The higher profit was led by strong price/mix, offset partially by lower tire unit volume due to weaker North American market.

Sales in the quarter increased 24% to $5.62 billion, higher than the Zacks Consensus Estimate of $5.22 billion. Tire unit volumes dipped 2% to 42.9 million, reflecting weaker industry volumes in the North American consumer tire market.

Improved price/mix improvements drove revenue per tire to increase 18% from the prior-year quarter, excluding the impact of foreign currency translation. Sales were also favorably impacted by a $221 million increase in sales in other tire-related businesses, primarily in North America, and favorable foreign currency translation of $348 million.

Goodyear had operating income of $382 million compared with $163 million in the year-ago quarter. The improvement reflected positive impact of $554 million due to better price/mix, which more than offset by negative impact from higher raw material costs of $428 million (or $381 million, net of raw material cost reduction actions).

Segment Results

Sales in the North American Tire segment elevated 18% to $2.41 billion due to improved price/mix. Original equipment unit volume fell 9% while replacement tire shipments went down 5%.

Sales were positively impacted by $178 million from higher sales in other tire-related businesses, primarily third-party chemical sales. Operating income increased significantly to $137 million from $16 million in the prior year.

Sales in the Europe, Middle East and Africa Tire segment surged 34% to $1.94 billion on the back of a 2% increase in tire unit volume, strong price/mix performance and favorable foreign currency translation effect of $222 million. Operating income in the segment increased $53 million to $126 million.

Sales in the Latin American Tire segment appreciated 21% to $640 million, driven by strong price/mix and favorable foreign currency translation effect of $55 million. Original equipment unit volume was flat while replacement tire shipments went down 5%. Operating income decreased $12 million to $54 million from the prior year.

Sales in the Asia-Pacific Tire segment rose 27% to $626 million, driven by strong price/mix performance and favorable foreign currency translation effect of $63 million. Original equipment tire unit volume dipped 10%, reflecting the impact of the earthquake and tsunami in Japan.  Replacement tire shipments inched up 3%. Operating income increased just $1 million to $65 million from the last year.

Financial Position

Goodyear had cash and cash equivalents of $1.80 billion as of June 30, 2011, a decline from $2.01 billion as of December 31, 2010. Long-term debt and capital leases were $5.04 billion as of June 30, 2011. Long-term debt (including capital leases) to capitalization ratio was as high as 77% as of June 30, 2011, down from 87.5% as of June 30, 2010.

Outlook

Goodyear expects unit tire volumes for the year to increase at the lower end of its previously announced range of 3% to 5%.

In North America, the consumer replacement industry volume is expected to increase by 0%–2%, consumer original equipment industry volume 5%–10%, commercial replacement volume 10%–15% and commercial original equipment volume 40%–50%.

In Europe, the consumer replacement industry volume is expected to grow between 4% and 6%, consumer original equipment volume 4% to 8%, commercial replacement volume 7% and 11% and commercial original equipment approximately 50%.

Goodyear also anticipates its raw material costs for the remainder of the year to increase more than 30% from the prior year. 

Our Take

Goodyear Tire & Rubber Company is one of the largest tire manufacturing companies worldwide, selling its products under the Goodyear, Kelly, Dunlop, Fulda, Debica, Sava and various other “house” brands as well as private-label brands.

On a worldwide basis, there are two major competitors for Goodyear – Bridgestone, Japan, and Michelin, France, who command about 55% of the global market together. Other significant competitors include Cooper Tire & Rubber Co. (CTB), Continental Tires, Pirelli, Toyo Tires, Yokohama Tire, Kumho Tires, Hankook Tire, and various regional tire manufacturers.

We are optimistic about Goodyear’s cost-saving actions. The company has targeted $1 billion of gross savings by 2012. In addition, the company expects to 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. These factors have led the company retain a Zacks #3 Rank, which translates to a rating of Hold for the short term (1 to 3 months) and we reiterate our Neutral recommendation for the long term (more than 6 months).

 
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