DNZOY Denso Corp Ltd (PK)

Goodyear Tire & Rubber Company (GT) reported a 32% rise in earnings to $111 million or 45 cents per share in the first quarter of 2013 from $84 million or 34 cents in the same quarter of 2012 (all excluding special items). The company’s earnings per share exceeded the Zacks Consensus Estimate by 15 cents during the quarter.

Including special items, the company reported a profit of $26 million or 10 cents per share in the quarter compared with a loss of $11 million or 5 cents a year ago.  The improvement in earnings was attributable higher earnings in the company’s North America, Latin American and Asia Pacific operations while Europe, Middle East and African operations lagged due to weak industry demand.

Revenues in the quarter slid 11% to $4.9 billion, missing the Zacks Consensus Estimate of $5.1 billion. Lower revenues reflect $364 million in lower tire unit volumes; $178 million in lower sales in other tire related businesses, mainly third party chemical sales in North America, and $115 million in unfavorable foreign currency translation. Tire unit volumes went down 8% to 39.5 million, mainly driven by lower volumes in Europe.

Operating income grew 3% to $302 million. The improvement reflects $230 million in lower raw material costs (excluding the benefit of cost reduction measures) and cost-saving activities, partially offset by $138 million in lower tire volume and associated unabsorbed overhead costs, lower price/mix of $71 million and $17 million in unfavorable foreign currency translation.

Segment Details

Revenues from the North American Tire segment dipped 13% to $2.2 billion due to a 6% fall in tire unit volumes to 14.8 million. However, operating income improved 59% to $127 million due to $163 million in lower raw material costs, partially offset by $58 million in decreased volume and unabsorbed overhead from related production cuts, $47 million in lower price/mix and $18 million due to lower third party chemical sales..

Revenues from the Europe, Middle East and Africa Tire segment ebbed 17% to $1.6 billion due to a 16% fall in tire unit volumes. Segment operating income plummeted 66% to $31 million as lower raw material costs of $89 million were offset by $83 million of reduced volumes and unabsorbed overhead from related production cuts as well as $62 million in lower price/mix..

Revenues from the Latin American Tire segment slipped 1.5% to $513 million on the back of $62 million in unfavorable foreign currency translation and $33 million related to the sale of the bias truck tire business, partially offset by a 5% increase in tire unit volumes and improved price/mix. However, operating income went up 9% to $60 million driven by price/mix improvements of $45 million and lower raw material costs of $4 million, partially offset by higher conversion costs of $33 million due to cost inflation, and $11 million in unfavorable currency translation.

Revenues from the Asia-Pacific Tire segment fell 2% to $567 million due to $15 million in lower sales in other tire-related businesses and $14 million in unfavorable foreign currency translation. However, operating income improved 25% to $84 million driven by $31 million in lower raw material costs, partially offset by $7 million in lower price/mix, $3 million in unfavorable foreign currency translation and the impact of inflation on wages and other costs. Operating income also improved by $4 million due to insurance recoveries for costs resulting from severe flooding in Thailand.

Financial Position

Goodyear had cash and cash equivalents of $2.4 billion as of Mar 31, 2013, up from $2.3 billion as of Dec 31, 2012. Long-term debt and capital leases were $6.5 billion as of Mar 31, 2013 compared with $5.0 billion as of Dec 31, 2012.

Cash flow from operations in the quarter escalated to $937 million from $754 million in the first quarter of 2012, driven mainly by higher profits, lower inventories and higher accounts payable.

Guidance

Goodyear expects full-year tire unit volume to be flat compared with 2012 due to depressing sales in Europe. The company expects the consumer replacement market to be flat and consumer original equipment to be up 5% in North America, while commercial replacement and commercial original equipment are both expected to remain flat on a year-over-year basis.

In Europe, Goodyear anticipates consumer replacement industry to be flat and consumer original equipment to be down 5%. The company also expects commercial replacement demand to increase 5% and original equipment volumes to be flat to up 5%.

Goodyear reinstated its operating income guidance of $1.4 billion–$1.5 billion for 2013, reflecting more than 12% increase over 2012. The company has also targeted positive cash flow in 2013, excluding pension pre-funding.

Goodyear plans to implement a three-point plan to return its business to historical margin level owing to the continued weakness in Europe and to ensure its long-term competitiveness in the region. In addition to its announced exit from the farm tire business in the Europe, Middle East and Africa region and closure of a manufacturing plant in France, Goodyear is focusing on 1) increasing its market share 2) growth in emerging markets and 3) productivity improvements across the region totaling $75 million to $100 million over the next three years.

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” brand names as well as private-label brands. The company currently retains a Zacks Rank #3 (Hold).

While we like to avoid Goodyear, stocks that are worth looking for in the same industry include Visteon Corp. (VC), Denso Corp. (DNZOY) and Gentherm Incorporated (THRM). They carry a Zacks Rank #1 (Strong Buy).
 

 
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