Gaining Traction at Goodyear Tire

Goodyear Tire & Rubber Company (GT - Analyst Report) is benefiting from a major restructuring program along with lower raw material costs and improved-selling prices. However, weak tire volumes compel us to rate the shares a Hold with a target of $20, which implies a P/E 6.5x our 2008 EPS estimate.

Goodyear Tire’s strength lies in its exposure to the strong heavy-truck market. This helps Goodyear better than its peers in hedging against earnings volatility in the tire industry. Profit margins are expected to improve. The company is cashing in on its well-received new tire designs such as Eagle F1 and expanding its reach in the consumer replacement market, as well as commercial original equipment manufacturer (OEM) and replacement markets in North America.

The company anticipates capital investments aggregating $1 $1.3 billion per year from 2008 to 2010. Goodyear plans to invest $500 $700 million to modernize four manufacturing plants in the U.S as well as improve cost efficiency. It is targeting emerging markets such as Latin America, Eastern Europe, and Asia.

The company is focusing on streamlining its operations by achieving cost reductions of more than $2 billion by 2009. On June 25, Goodyear announced that it will close its manufacturing facility in Somerton, Australia. The closure will provide Goodyear with annual cost savings of approximately $35 million. The company is using its capital initiatives to meet two objectives by 2012: to increase its capacity to produce high value-added tires by 50% and to increase its low-cost capacity to 50% of its global total.

Currently, Goodyear shares are trading at 5.9x our 2008 EPS estimate of $3.09. We believe the emergence of a healthier balance sheet and noticeably better sales from emerging markets will help earnings.

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