On Jun 11, we upgraded Goodyear Tire & Rubber Company (GT - Free Report) to Neutral based on its focus on the emerging markets of Latin America, Eastern Europe and Asia and improved earnings in the first quarter of 2013. However, we are concerned about the decline in revenues and decrease in tire unit volumes.
Why the Upgrade?
On Apr 26, Goodyear reported a 32% rise in earnings to $111 million or 45 cents per share (excluding special items) in the first quarter of 2013 from $84 million or 34 cents in the same quarter of 2012. The quarter’s earnings per share exceeded the Zacks Consensus Estimate by 15 cents.
The improvement in earnings was attributable to higher earnings in the company’s North America, Latin American and Asia Pacific operations, while Europe, Middle East and African operations lagged due to weak industry demand. Revenues in the quarter slid 11% to $4.9 billion, missing the Zacks Consensus Estimate of $5.1 billion.
Following the release of the first quarter results, the Zacks Consensus Estimate for 2013 increased 2.4% to $2.12 per share. The Zacks Consensus Estimate for 2014 dropped 0.8% to $2.48 per share. Currently, Goodyear retains a Zacks Rank #3 (Hold).
Goodyear, one of the world’s largest tire manufacturers, will benefit from the implementation of three-point plan. This strategy focuses on improving margin level, which was adversely affected by the continued weakness in Europe. This will also ensure long-term competitiveness of the company in the region.
In addition, Goodyear emphasizes on increasing its market share together with expansion in emerging markets and productivity improvements across the region over the next three years.
However, we are concerned about the sluggish industry demand, which puts increasing pricing pressure from OEMs on the company. This will adversely affect the profit margins of the company as it sells nearly 30% of its tires to OEMs.
Other Stocks to Consider
Some other stocks that are performing well in the broader industry where Goodyear operates include Visteon Corp. (VC - Free Report) , STRATTEC Security Corporation and Magna International Inc. (MGA - Free Report) . All these companies carry a Zacks Rank #1 (Strong Buy).