Goodyear profit beats estimates, shares jump
By David Bailey
DETROIT (Reuters) - Goodyear Tire & Rubber Co <GT.N> posted a stronger-than-expected quarterly profit on Friday, driven by price increases, the sale of more expensive tires and favorable foreign exchange rates, sending its shares up 6.4 percent.
Goodyear, the largest U.S. tire maker, said the slowing U.S. economy remained a concern and it would likely cut production by 5 million tires in North America over the balance of 2008 to align with lower demand from vehicle manufacturers.
The company also cut its industrywide forecast sharply for North American tire demand from manufacturers of cars and light trucks such as sport utility vehicles and pickups. It also cut its forecast for consumer replacement tire demand in the region.
Goodyear sold fewer tires worldwide in the first quarter due to weak demand from vehicle manufacturers in North America and from consumers in North America and Europe.
Softening consumer demand was mainly in lower-priced tires that produce lower profits and its average revenue per tire rose 7 percent. It also said it had not seen evidence of consumers trading down to less expensive tires.
"On balance, our view of Goodyear's performance for the quarter is highly positive," Calyon Securities analyst Mark Warnsman said in a note to clients.
Warnsman said raw material cost increases "remain a valid and ongoing concern," but he pointed to Goodyear's ability to more than cover those costs so far.
Goodyear reported first-quarter net profit of $147 million, or 60 cents per share, compared with a net loss of $174 million, or 96 cents per share, a year earlier. Sales rose 9.8 percent to $4.94 billion.
Goodyear earned 67 cents per share excluding one-time items. On that basis, analysts, on average, expected 48 cents per share, according to Reuters Estimates.
Foreign currency translation added $341 million to sales and $27 million to operating income, Goodyear said.
NORTH AMERICAN VOLUME DOWN
Price increases and a sale of a higher percentage of more expensive tires added $157 million to operating income.
A price spike on raw materials late last year has not yet fully struck the tire maker, which expects raw materials costs to have a more significant impact as the year progresses.
The company has raised prices to more than cover rising costs for raw materials, such as natural rubber and petroleum- based synthetic rubbers. It left intact its forecast for those costs to rise 7 percent to 9 percent for the year.
North America, its largest unit, reported operating income of $32 million, compared with a loss of $20 million a year earlier. Tire unit volume was down nearly 8 percent to 17.8 million tires in North America in the quarter, mainly because of lower shipments to vehicle manufacturers.
"On balance, we were disappointed with (North America)," JP Morgan analyst Himanshu Patel said in a note to clients.
He said international operations were responsible for the company exceeding JP Morgan's forecast.
Patel said weaker sales of consumer tires to both vehicle manufacturers and the replacement market in North America was a potential concern.
Tire makers have eliminated significant production capacity in North America in recent years, giving them room to cope with declines in tire shipments without resorting to price cuts.
Goodyear's strategy has been to sell more expensive, higher-margin brands in North America overall, which has helped offset reductions in mostly low-margin tire sales to vehicle manufacturers. U.S. light vehicle sales have been running at a sharply lower rate so far in 2008.
Goodyear slashed its 2008 forecast for car and light truck tire demand in North America from vehicle manufacturers. It now expects a drop of as much as 10 percent, compared with its previous forecast for a decline of as much as 4 percent.
The Akron, Ohio-based company also lowered its forecast for overall 2008 demand for replacement tires for cars and light trucks in North America to flat to down 1 percent from flat to up 2 percent.
Goodyear also cut in half its forecast for 2008 growth in industry tire shipments to commercial truck manufacturers. It now expects tire shipments to rise up to 15 percent in 2008.
Goodyear shares were up $1.75 to $29 in morning trading on the New York Stock Exchange after rising as high as $30.10 earlier in the session. In the first three months the year the shares fell 8.6 percent, while the Dow Jones U.S. automobiles and parts index <.DJUSAP> dropped 12.25 percent.
(Reporting by David Bailey; editing by John Wallace/Andre Grenon)