We upgrade our recommendation on Goodyear Tire & Rubber Co. (GT) to Outperform from Neutral. Goodyear 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 (such as Lee, Kingstone, Douglas, Mohave and Republic) as well as private-label brands (such as Roadhandler, Star, and Monarch).
Goodyear sells tires, undertakes automotive repairs and provides other services through more than 1,600 tire and auto service centers. Manufacturing operations at 56 facilities are spread across 22 countries.
The company released its third quarter earnings on October 28, 2011. Adjusted profit leapt to $195 million or 72 cents per share from $32 million or 13 cents in 2010 quarter. The increase in profit was attributable to improved price/mix and the sale of new and innovative products.
Sales went up 22% to $6.1 billion on flat tire unit volumes of 47.7 million. However, it was lower than the Zacks Consensus Estimate of $6.2 billion. Sales in the quarter were positively impacted by strong price/mix, increase in sales in other tire-related businesses (primarily chemical sales in North America), and favorable foreign currency translation of $175 million.
Goodyear expects the global tire industry to continue to grow in 2011. In North America, the company expects the consumer replacement industry to be flat, consumer original equipment to grow 6%, commercial replacement to go up 13% and commercial original equipment to surge 50%. In Europe, the consumer replacement industry is expected to grow 4%, consumer original equipment to rise 5%, commercial replacement to increase 1% and commercial original equipment to soar 50%.
Goodyear remains focused on the twin goals of top-line growth and cost reduction. The top-line growth incorporates an unprecedented number of product launches. The company has targeted an additional $1 billion of gross savings by 2012.
In addition, the company is using its capital initiatives to meet two objectives by 2012: increase its capacity to produce high value-added tires by 50% and increase its low-cost capacity to 50% of its global total.
Moreover, the company aims to tap significant growth opportunities in the emerging markets of Latin America, Eastern Europe and Asia. The company is investing up to $500 million for the relocation and expansion of its manufacturing plant in Dalian, China, as well as $600 million for expanding production in Brazil and Chile, and $500 million to modernize and expand production in Poland and Germany.
The shares of Goodyear Tire maintain a Zacks#1 Rank reflecting a short-term “Strong Buy” rating.
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