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On Dec 6, 2013, we downgraded The Goodyear Tire & Rubber Company (GT - Analyst Report) to Neutral from Outperform. The downward revision was based on lower revenues, increasing debt and capital leases, high competition and rising operating cash outflows.

Reasons for Downgrade

Goodyear’s revenues in the third quarter slipped 5% to $5 billion, missing the Zacks Consensus Estimate of $5.3 billion. The year-over-year decline in revenues reflects lower sales in other tire related businesses, decline in price/mix and unfavorable foreign currency translation, partially offset by increase in tire unit volumes.

Goodyear’s long-term debt and capital leases rose to $6.5 billion as of Sep 30, 2013 compared with $5.0 billion as of Dec 31, 2012. Cash outflow from operations in the first nine months of 2013 dropped to $298 million from $329 million in the year-ago comparable period.

Moreover, Goodyear faces pricing pressure from original equipment manufacturers (OEM) due to weak industry demand. This negatively impacts the company’s profit margins as it sells about 30% of its tires to OEMs.

However, on the positive side, Goodyear regularly launches innovative products to boost sales. The company is implementing a three-point plan to return its business to historical margin levels and to retain its position as a strong long-term player in Europe.

At present, Goodyear expects its operating income for 2013 to surpass the previous guidance of $1.5 billion. The company predicts that the segment operating income will grow 10%–15% annually till 2016. Goodyear also aims to attain positive cash flow (excluding pension pre-funding) till 2016.

Other Stocks to Consider

Goodyear currently carries a Zacks Rank #2 (Buy). Other stocks that are worth looking out for in the same industry include Continental AG (CTTAY), Tower International, Inc. (TOWR - Snapshot Report) and Gentex Corp. (GNTX - Snapshot Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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