Goodyear ‘Poised for Significant Earnings Improvement’

Goodyear Tire & Rubber Company reported first quarter 2009 sales of $3.5 billion, down from record sales of $4.9 billion in first quarter of 2008. However, Goodyear only reported net losses of $333 million, compared with Goodyear net income of $147 million (60 cents per share) in the 2008 quarter. While obviously significant the losses certainly weren’t as bad as they could have been for two reasons. Firstly, they were, according to financial news sources, ahead of mainstream analysts’ opinions; and secondly because the total losses are roughly equal to the increases in raw material costs the company experienced in the first quarter ($332 million, up 31 per cent). The explanation for greatly reduced turnover was said to be the tyre market’s sharply reduced demand at the start of 2009, however as various sources are predicting that the US market has bottomed-out and raw material prices are believed to have stabilised, Goodyear could be in for a better second half of 2009.

This view is certainly supported by Deutsche Bank analysts who sent out an investor’s note along these lines a week after Goodyear’s results were published. Despite reporting losses of $333 million in the first quarter of 2009 Deustche Bank analysts predict a short to medium term improvement in Goodyear’s financial performance: “Subtracting $1.38 billion (around $36 a tyre) of raw material costs from Goodyear’s first quarter 2009 results, and $1.33 billion ($28 per tyre) of raw materials from Goodyear’s first quarter 2008 results, we noted that GT’s non-raw material costs of goods sold declined to $1.6 billion from $2.2 billion.”

On the subject of raw material prices, the analysts said that cost declines are likely to represent a very large tailwind for Goodyear by the second half of 2009: “If we replace first quarter 2009 raw material costs per tyre with our year-end projected raw material costs, we estimate that first quarter earnings per share would have been $1.08 higher. We also continue to believe that tyre demand is likely to improve by the second half of 2009.”

According to Deutsche Bank, Goodyear experienced a 3.8 million unit (11.2 per cent) drop in replacement demand during the quarter, and a 5.7 million unit (40.8 per cent) decline in global OE volume. The analysts also report that Goodyear reduced its inventory by $300 million worth of tyres by reducing production by 12 million units; well in excess of its 9.5 million unit sales decline.