Goodyear Tire & Rubber Company (GT) posted a threefold increase in profit to $127 million or 51 cents per share in the first quarter of 2011 from $41 million or 18 cents per share in the same quarter of 2010 (all excluding special items). The profit far exceeded the Zacks Consensus Estimate 13 cents per share.
The impressive rise in profit was primarily attributable to commendable performance by all its businesses, especially the North American Tire, offsetting higher raw material costs through improved price/mix.
Sales during the quarter zoomed 27% to $5.40 billion, surpassing the Zacks Consensus Estimate of $4.81 million. This is the highest sales recorded by the company for any quarter in its history on tire unit volumes of 46.8 million, up 7% from the first quarter of 2010.
The increase in volume contributed $219 million, increase in sales in other tire-related businesses, primarily third-party chemical sales in North America, $276 million and favorable foreign currency translation $125 million to the overall increase in revenues. Besides, strong price/mix improvements also led to the sales growth as it drove revenue per tire up 15% from the 2010 level.
Segment operating income was $327 million during the quarter compared with $240 million a year ago. The increase in operating income was driven by higher volume and improved price/mix ($361 million) that offset $385 million in higher raw material costs.
Segment Performance
Sales in the North American Tire segment soared 30% to $2.31 billion. Sales were favorably impacted by a 13% increase in volume to 17.1 million units and better price/mix and $210 million due to higher sales in other tire-related businesses, primarily third-party chemical sales. Unit sales of original equipment (OE) tires grew 8% while replacement tires went up 14.5%.
The segment operating income increased $54 million to $40 million, owing to improved price/product mix ($116 million), fixed cost recovery due to higher production volumes ($43 million), higher sales volume ($18 million) as well as decreased pension expense and benefits from cost reduction actions, which offset higher raw material costs ($120 million).
Sales in the Europe, Middle East and Africa Tire segment rose 28% to $1.96 billion on the back of a 7% rise in tire unit volume to 19.7 million units and favorable price and product mix. Unit sales of OE tires rose 6% while replacement tire shipments increased 7%.
Operating income in the segment increased $44 million to $153 million due to better price/mix ($124 million), fixed cost recovery due to higher production volumes ($34 million), higher sales volume ($23 million) and cost reduction actions, partially offset by higher raw material costs ($146 million).
Sales in the Latin American Tire segment went up 22% to $585 million despite a 4% fall in unit sales to 4.9 million. OE unit volume rose 10% while replacement tire unit shipments declined 11%.
Operating income in the segment dipped $9 million to $67 million due to an $8 million depreciation adjustment related to prior periods and an increase in equity-based taxes of $5 million as well as lower volume of $7 million and the impact of inflation on costs.
Sales in the Asia-Pacific Tire segment scaled up 14% to $551 million, despite a marginal decrease in tire unit volume. Unit sales of OE tires were flat while that of replacement tire shipments slid 4%.
Operating income in the segment declined a tad $2 million to $67 million due to higher raw material costs and costs related to the planned start up of a new factory in China.
Financial Position
Goodyear had cash and cash equivalents of $2.22 billion as of March 31, 2011, an improvement from $2.00 billion at the end of prior-year. Long-term debt and capital leases were $5.04 billion as of March 31, 2011, reflecting a long-term debt (including capital leases)-to-capitalization ratio of 79% as of the above date, down from 87% as of December 31, 2010.
Guidance
Goodyear expects unit sales volumes to increase at the higher end of the previously announced range of 3%–5%.
In North America, the company anticipates the consumer replacement industry to grow between 2% and 4%, consumer original equipment between 5% and 10%, commercial replacement between 6% and 10% and commercial original equipment between 40% and 50%.
In Europe, the consumer replacement industry is expected to grow between 4% and 6%, consumer original equipment 4% to 8%, commercial replacement between 7% and 11% and commercial original equipment approximately 50%.
Goodyear anticipates raw material costs for the remainder of 2011 to increase 25%–30% compared with the prior year.
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” brands as well as private-label brands.
On a worldwide basis, there are two major competitors for Goodyear – Bridgestone, Japan, and Michelin, France, who command about 55% of the global market together. Other significant competitors include Cooper Tire & Rubber Co. (CTB) , Continental Tires, Pirelli, Toyo Tires, Yokohama Tire, Kumho Tires, Hankook Tire, and various regional tire manufacturers.
We are optimistic about Goodyear’s cost-saving actions. The company has targeted $1 billion of gross savings by 2012. In addition, the company expects to benefit from its focus in the emerging markets of Latin America, Eastern Europe and Asia.
However, Goodyear faces pricing pressure from OEMs due to weak industry demand. Further, its highly leveraged balance sheet is worrisome. These factors have led the company retain a Zacks #3 Rank, which translates to a rating of “Hold” for the short term (1–3 months) and we reiterate our “Neutral” recommendation for the long term (more than 6 months).
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