Backlash to Goodyear profit re-statement

The revelation recently by Goodyear that it has overstated profits by $100 million over five years has led to deep concern among investors and industry analysts. The most immediate effect came the day after the announcement, when Goodyear’s share price tumbled. At one stage, the price had fallen by 19 per cent, but it eventually closed down nine per cent, at $6.19. One shareholder, who purchased 500 Goodyear shares two years ago, when the price was $30, was so incensed that she filed a lawsuit in federal court, alleging that Goodyear deliberately mis-stated its profits in order to maintain an artificially high share price. The shareholder is seeking class-action status for the lawsuit.

While other shareholders have not resorted to such drastic action, there is no doubt that the episode has done nothing for the tyre manufacturer’s credibility in the eyes of its stockholders, nor among industry watchers. Most agree that the amount of $100 million is – taking annual turnover into account over the five-year period in question – not that big a deal, however, the worry is that it took so long to discover the mistake and are there any other nasty surprises lurking in Goodyear’s accounts? One can almost hear the whispering about “no smoke without fire”, although to be fair, there have been no other revelations since. There is no doubt that Goodyear’s credibility has been damaged, with one analysts saying that it is “a quality issue” and any example of poor control is a cause of concern to the market.

One possible consequence of the re-statement could be a delay in Goodyear’s promised issue of bonds, scheduled for later this year as part of the recently-negotiated labour agreement with the Steelworker’s union. As analyst Saul Rubin of UBSWarburg was quick to point out, Goodyear has said that it will not now report on third quarter figures until mid-November, so no bond issue will be forthcoming until then, at least. He goes further, saying that “if the bond market reacts badly to this news, then a deal may simply be too difficult to get off the ground”. Should Goodyear not be able to meet its commitment to raise $250 million of bonds and $75 million of equity by the year end, then under the terms of the labour agreement, it will have to pay employees a $20 million penalty.

Just to add to Goodyear’s woes, UBSWarburg believes that the pressures facing Goodyear are not fully reflected in today’s share price and UBSW continues to rate the shares “Reduce 2”, suggesting that $3.50 is a fair price.

Unrest is not confined to investors and analysts, as some employees made the point that Goodyear top executives were rewarded with performance-linked bonuses for the time covering the re-statement period and, if profits are to be reduced, then it would be only fair for the executives to return part of their bonuses to reflect the new figures. The company declined to comment on this suggestion.