Shares of Goodyear Are No Treat for Investors

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The New York Sun

It certainly looked like a pre-Halloween investment treat for the longsuffering shareholders of Goodyear Tire & Rubber ($15.24), the world’s third-largest tire maker. That was last Thursday’s sizzling earnings report showing a tripling of its third-quarter profits, which led investors to snap up shares of Goodyear, driving up the price that day by nearly 15%.


If you were one of the buyers, too bad – you’ve been tricked in a sad case of market trick-and-treating. It’s like biting into a seemingly juicy apple and finding worms in it. That, in effect, is the message from the mutual-fund-industry tracker Morningstar, which, in the case of Goodyear, argues that investors are looking at a lot of worms.


That’s probably no secret to Goodyear’s shareholders, who have seen the company’s stock, which once sold as high as $76.75, collapse and trade the last few years between a low of $5.37 and a high of $18.59.


Summing up Morningstar’s negative view, one of its analysts, Ben Butwin, urges investors to steer clear of Goodyear shares. He says, “The cards are stacked against the company,” which, he adds, is riddled with problems. In particular, Mr. Butwin points out that Goodyear operates in a cutthroat industry with high fixed costs, little brand loyalty, and where companies are forced to slash prices to gain market share.


But Goodyear’s troubles, he emphasizes, don’t stop there, noting that recent accounting shenanigans and ineffective controls over the preparation and review of its financial statements have forced it to restate earnings more than once. That, in turn, he says, is causing him to question the reliability of future releases.


Mr. Butwin further notes that Goodyear is also involved in a myriad of lawsuits relating to asbestos claims and other product liability matters. In addition, he goes on, the company is in serious financial distress, its credit rating has dropped to speculative levels, and the likelihood of the firm comfortably paying off its $6 billion of debt is slim.


Goodyear, Mr. Butwin said, claims 40% of the market for original equipment tires, but a price war among automakers forces it to settle for minimal gains. Likewise, in the replacement tire industry, better aftermarket tire life has dampened demand.


While Goodyear is optimistic about the future, the analyst says the cyclicality and competitiveness of the industry will eventually lead to more ordinary levels of prices and revenue growth. What’s more, he concludes, much of the company’s earnings improvement seems to be temporary, such as those due to insurance recoveries and the consolidation of affiliates.


Goodyear, which has predicted a fourth-quarter profit increase but at a lesser rate than in the third quarter, operates 90 plants worldwide and has 1,700 retail tire and auto centers. In September, it said it would close its more costly tire-making plants as part of a restructuring effort designed to save $1 billion by 2008. Last year’s 310 775 419 786sales were $18.3 billion.


As far as the bottom line goes, the message from Morningstar is unmistakable: Buyer beware; Goodyear is no treat.


***


DRESSING UP YOUR PORTFOLIO: “Dan, What do you think of Polo Ralph Lauren ($48.61)?” Judy Lori e-mails me. “I bought the stock at $35 and I’m up almost 35%. Is it time to sell and take my profit? My broker says no. Please advise. Thank you.”


Judy, your broker may be giving you good advice: The well-known apparel designer, a real treat for you so far, could still be one going forward. At least, that’s what Standard & Poor’s thinks. Impressed by the company’s big fiscal first-quarter-earnings jump to $0.48 a share from $0.12 a year earlier and the strong performance of all of the designer’s sales channels, particularly the wholesale business, S &P has raised its earnings outlook and believes the stock is worth buying because it offers above-average potential, or more specifically about a 25% gain to $60 over the next 12 months. Its earnings outlook: $2.93 in fiscal 2006 (ending next March) and $3.35 in 2007. A word of caution: Should shrinking consumer confidence lead, as some suspect, to disappointing holiday sales, the stock, it’s thought, could be vulnerable to a stiff decline.


The New York Sun

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