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On Apr 14, we downgraded Goodyear Tire & Rubber Company (GT - Analyst Report), one of the world’s largest tire manufacturers, to Underperform based on the company’s lower revenues in the fourth quarter of 2012 and reduced operating income guidance for 2013.

Why the Downgrade?

On Feb 12, Goodyear reported a profit of $97 million or 39 cents per share in the fourth quarter of 2012 that significantly rose from $6 million or 3 cents in the same quarter of 2011 (all excluding special items). With this, the company has beaten the Zacks Consensus Estimate of 21 cents per share.

However, revenues fell 11.2% to $5.0 billion owing to $338 million in lower tire unit volumes, $221 million lower sales in other tire related businesses, mainly third-party chemical sales in North America, and $85 million loss in unfavorable foreign currency translation. It was also lower than the Zacks Consensus Estimate of $5.4 billion. Tire unit volumes declined 7% to 40 million, primarily due to lower volumes in Europe.

Following the release of the fourth quarter results, the Zacks Consensus Estimate for 2013 decreased 6% to $2.05 per share. The Zacks Consensus Estimate for 2014 dropped 3.4% to $2.52 per share. Currently, Goodyear retains a Zacks Rank #4 (Sell).

Owing to the sluggish industry demand, Goodyear faces increasing pricing pressure from OEMs. This will adversely affect the profit margins of the company as it sells nearly 30% of its tires to OEMs.

Goodyear lowered its operating income margin to $1.4 billion–$1.5 billion for 2013 compared with the prior outlook of $1.6 billion. The downward revision was due to weaknesses in European market together with related production cuts.

Other Stocks to Consider

Some other stocks that are performing well in the industry where Goodyear operates include Gentherm Incorporated (THRM - Snapshot Report), Visteon Corp. (VC - Snapshot Report) and Denso Corp. (DNZOY). All these companies carry a Zacks Rank #1 (Strong Buy).

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