Goodyear Reverses After Earnings News

S&P downgrades the stock to sell as it still sees near-term challenges, despite progress in several key areas last year

The Goodyear Tire & Rubber Company (GT) said Feb. 16 that it lost $367 million from battling 15,000 striking employees for 86 days over how to cut costs.

The Akron, Ohio tire maker posted a net loss of $358 million during the three months ended Dec. 31, including items like the recently ended strike, compared to a net loss of $51 million during the same period of 2005. Sales were nearly $5 billion, a 2% increase year over year excluding the impact of businesses divested in 2005. "We made outstanding progress in several key focus areas in 2006, in spite of the challenges from the strike, high raw material costs and difficult market dynamics," CEO Robert J. Keegan said in a press release Feb. 16.

Goodyear has indeed solved some problems. In late December, the company managed to end a strike that had started Oct. 5. Goodyear hammered out a three-year pact with the United Steelworkers (USW), in which Goodyear will take steps like closing its Tyler, Texas, plant while moving responsibility for its union retirees' health care to a $1 billion trust. The deal is expected to save Goodyear $70 million in 2007, $240 million in 2008 and $300 million in 2009 (see, 12/29/06, "Goodyear Trims Labor Costs").

After that news, investors enthusiastically bid up Goodyear stock by 5% to around $20.99 on Dec. 29. Since then, the stock hit a high for the year on Feb. 9 of $25.85. On Feb. 16, Goodyear slipped 2.1% to $24.89 in afternoon trading on the New York Stock Exchange.

Standard & Poor's Equity Research analyst Efraim Levy downgraded the stock to sell from hold and cut his 2007 EPS estimate by 7 cents to $1.60. "Our confidence in GT's turnaround is growing, but we still see near-term challenges," he said in a research note.

Levy noted that he expects Goodyear to eventually issue equity to shore up its finances. He also said he raised his target price by $2 to $24, or 15 times our 2007 estimate, on higher peer valuations. "However, with shares above that level, we recommend sell," he said. (S&P, like, is owned by The McGraw-Hill Companies.)

Goodyear is still struggling with challenges like improving its global production. CEO Robert Keegan, who took over from Samir Gibara on Jan. 1, 2003, has been turning the company around in the face of a slump in the auto industry (see, 5/28/03, "Goodyear: Still Spinning Its Wheels"). Time will tell how long the tough times last.

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