Analysts Downgrade Goodyear

In the United States, analysts UBS Warburg have downgraded Goodyear stocks from “Hold” to “Reduce” and the price target per share from $8 to $5.50. The analysts accept that the company’s sales performance overseas is improving, but Goodyear is struggling in the US and the analysts say they see “challenging years ahead.

“Recent benefits from lower raw material prices are tailing off and are expected to rise 5-7 per cent next year. There is the spectre of higher pension expenses on the horizon, with UBS Warburg saying that the sum required by mid-2004 will be in the order of $350-$500 m, with a similar sum probably due the following year. As well as these factors, the analysts list five separate impediments to Goodyear making progress on the US market – an area crucial to the company, as North America is where Goodyear has over half its business.

The five reasons are:1. Bridgestone will continue to be aggressive in its pursuit of market share in America. Of the top three (Bridgestone, Goodyear and Michelin), Bridgestone has a unique advantage in that it is virtually unassailable in its home market, with a share of over 50%.

The money earned in Japan allows Bridgestone to spend on building up share in the US and Europe while Michelin and Goodyear find it extremely difficult to make any meaningful inroads into the Japanese market.2. Other premium brands besides Goodyear – especially Michelin – command higher prices in North America.

Michelin has an effective multi-brand strategy, while Goodyear used its premium brand to span the premium and mid-range sectors; something which UBS Warburg argued devalued the brand. They believe that Dunlop will be used as the mid-range brand, but this is not yet happening.3.

When it comes to truck tyres, the analysts argue that Goodyear is lagging behind from the technological standpoint and is falling behind Bridgestone and Michelin. With fleet owners willing to pay extra for longer-lasting tyres, or those that reduce costs (e.g.

by saving fuel or allowing increased payload) the importance of innovation and R&D is paramount. Goodyear, say the analysts, is struggling in this area.4.

Half of Goodyear’s replacement sales (by volume) are accounted for by private brands and here, as in other markets, competition is intense. Competition comes from two distinct fronts; firstly there are those companies who concentrate much more on private brands and are more efficient (such as Cooper) and, secondly, there are a growing number of private label tyres imported from areas of low-cost production. UBS Warburg estimates that Cooper holds a 25-30 per cent share of the private label market, with imports rising recently to 15 per cent.

Goodyear has the worst of both worlds, with high-cost production in a low-cost marketplace as the company uses essentially the same “green” tyre for premium and private brand tyres.5. Goodyear’s high debt level and weak earnings would seem to imply a cut back (or at least a standstill) in R&D and capital spending (see 3 above).

Falling behind in technological development will do nothing to aid Goodyear’s future competitiveness.These are the fundamental operational issues that urgently need to be addressed, say the analysts, with changes in manufacturing processes and marketing, plus a probable move to lower-cost centres of production. Goodyear has such options available in Brazil and Eastern Europe.