Goodyear Tire & Rubber Company (GT) reported its results for the first quarter of the year on April 28, 2010, beating the Zacks Consensus Estimate by a significant margin of 17 cents per share. However, the market failed to react very positively, with share prices mostly falling in the subsequent days.
Analysts declined to be encouraged by the results either. Below we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for both short-term and the long-term outlook for the stock.
First Quarter Highlights
Goodyear Tire outdid the Zacks Consensus Estimate with the help of an impressive rise in tire unit volume during the quarter. Sales during the quarter grew 21% to $4.3 billion. This reflected a positive impact of $399 million, led by a 14% increase in tire unit volume due to strong global demand and growth in the emerging markets.
Operating income was $240 million in contrast to a loss of $176 million in the year-ago quarter. This was attributable to higher sales and vehicle production, cost reductions of $148 million and a decrease in raw material costs by $283 million.
Sales in all the geographical segments — North America, Europe, Middle East and Africa, Latin America and the Asia-Pacific — rose significantly. However, operating income in the Latin American segment reduced $28 million due to currency devaluation and reduced volumes.
Goodyear’s commercial truck business is down. Its global commercial truck volumes fell 5 million units to about 12 million units, a 30% decline during the quarter.
The truck replacement market grew 37%, primarily reflecting dealers buying ahead of announced price increases. However, the commercial original equipment market was flat compared with the year-ago level.
The significant challenge for Goodyear is to tackle rising raw material costs. In the first quarter, the company’s unit raw material costs went up 5% from the fourth quarter of 2009. In the second quarter, the company expects a 15% sequential increase in per unit raw material costs. In the second half of the year, the percentage of increase could go up over 35% year over year.
(Read our full coverage on this earnings report: Good Quarter for Goodyear)
Earnings Estimate Revisions – Overview
Estimate revisions have been discouraging since the earnings were released. Share price movement has been unfavorable. We can now move into the earnings estimate details.
Agreement of Analysts
The table below depicts a rather glum picture among the analysts regarding Goodyear’s earnings for fiscal 2010 due to a weak commercial truck business, devaluation in Venezuela and higher raw material costs outlook. Out of 8 analysts covering the stock, 3 have revised downward estimates for fiscal 2010 while 2 analysts have revised upward over the last 30 days. This depicts marginal downward pressure on the estimates.
However, the trend is neutral for fiscal 2011, reflecting a recovery in the market to offset the negatives associated with the company. There was one analyst revising his/her estimate upward and one in a downward direction over the last 30 days.
Magnitude of Estimate Revisions
Earnings estimates for fiscal 2010 are reduced by 7 cents from 31 cents to 24 cents since the earnings announcement, due to factors explained in the agreement of estimate revisions. However, the trend reverses for fiscal 2011 due to factors explained in the same section. Analysts have raised the estimates by 8 cents from $1.52 to $1.60 for the year.
Goodyear Tire in Neutral Lane
As discussed above, Goodyear faces several challenges including a weak commercial truck business, Venezuelan devaluation of currency and potentially unfavorable raw material cost. These apart, its highly leveraged balance sheet is worrisome. As of March 31, 2009, the company’s long-term debt-to-capitalization ratio stood at 86%. Higher debt levels not only raise the interest burden but may also lift the company’s cost of capital.
However, Goodyear will benefit from its twin goals of top-line growth and cost reductions. The company has succeeded in achieving cost reductions of $2.5 billion by 2009 under the Four-point Cost Saving Plan. Goodyear has also targeted an additional $1 billion of gross savings by 2012. Further, it aims to tap significant growth opportunities in the emerging markets of Latin America, Eastern Europe and Asia.
These considerations have led us to reiterate our Neutral recommendation on the stock for the long term, and a Zacks #3 Rank (Hold) for the short term.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
Read the full analyst report on “GT”
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