The company attributed the positive report to a shift toward selling more high-end tires in North America, and cost-cutting measures. And Goodyear also said that Continental AG, a car-parts and tire supplier based in Germany, may be interested in buying its Engineered Products division, which posted sales of $1.63 billion last year and had a 6.3% operating margin.
Goodyear's shares have rolled roughly 7% higher since the report last week, but looking at the numbers, the reward may not outweigh the risk.
Segmenting the Problems
The largest sector, European Union Tire, which accounts for almost 30% of the company's earnings, fell short of analysts' estimates, reporting sales of $1.14 billion. That was down 4.2% from the previous year's $1.20 billion. Goodyear cited market-share losses and pricing pressure in the consumer-replacement segment as the reasons for the shortfall.
Goodyear's North America segment is its largest based on revenue, but based on operating profit, it's the company's fourth-largest, accounting for only 14% of earnings in 2005. In the report, Goodyear said that North American sales increased 13.4% vs. the same period a year ago.
Raw material prices also continue to be a concern for Goodyear. These costs amounted to $185 million for the company, 14% higher than last year's comparable quarter. Goodyear management said it expects raw material costs to rise in the second quarter and tail off in the second half of the year. But it made this same mistake five months ago, forecasting for lower-than-expected raw material costs in its fourth-quarter report on Jan. 20. The company missed its quarterly estimates because of the miscalculation.
To view Frank Curzio's video take of this column, click here
Also, according to some competitors of Goodyear, it would be surprising to see raw material costs decline in 2006.
Continental AG, which also reported earnings on May 4, cautioned investors there was earnings risk from raw material prices that could be greater this year. And
, in its 10-Q on May 3, said that the increased price of crude oil continues to contribute to the cost increases for raw materials.
But there's more than input costs and sales woes threatening Goodyear. The company's debt and pension position also remain burdens.
Goodyear has more than $5.4 billion in total debt and a low credit rating (B). The company's interest costs alone could reach $450 million in 2006. And more than 75% of the $5.4 billion is issued in the U.S., where the company sees no tax benefits from interest-expense payments.
The company also announced it will pay about $760 million toward its pension portfolio this year. The program is $3 billion underfunded currently. To put this in perspective, Goodyear's total market cap is $2.7 billion.
Goodyear has been restructuring since 2003, and it has overcome some hurdles through new product developments and cost-cutting measures in terms of layoffs and asset sales. But these positives have been offset by higher pension liabilities from rising interest rates and higher raw material costs.
These risks are not short term in nature and could impact future earnings. So while the ongoing restructuring effort has shown some promise, Goodyear will probably not see these results in 2006.
Should you invest in Goodyear? The answer is no.
In keeping with TSC's editorial policy, Frank Curzio doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Frank X. Curzio is a research associate at TheStreet.com, where he works closely with Jim Cramer. Previously, he was the editor of The FXC Newsletter and senior research analyst for Greentree Financial.
He appreciates your feedback;
to send him an email.