May was a good month for retail tire dealers. According to the Northcoast Research Tire Demand Index, consumer demand for passenger and light truck replacement tires improved slightly on a year-over-year basis in May.

The uptick snapped a three-month streak of negative volumes. However, Nick Mitchell, a managing director and research analyst with Northcoast Research Holdings LLC, says the results were still below average, a pricing trend in 2017.

"Our contacts offered little explanation as to why the soft trends across the PLT replacement tire market have persisted into the second quarter of 2017," says Mitchell. "In fact, most of the dealers said the weak results go against the favorable trends in many of the key drivers of intermediate-term demand. This commentary leads us to believe the odds are still high that the weak trends will prove to be transitory.

"Additionally, our channel work continues to suggest that manufacturers have ratcheted up promotional activity (i.e., volume-based promos upstream and rebates and price investments downstream) in 2Q17 in response to weak sell-out trends and elevated channel inventory coming out of 1Q17... the structure, magnitude, and duration of the effective price discounts in the U.S have been a little more aggressive than we expected, especially in the Tier II and Tier III segments of the market."

Dealers have only reported seeing the strongest trends across the Tier I brands once this year, says Mitchell, "while Tier III tires have performed better than average during this time frame. Dealers also suggested that strong promotional activity in the lower tiers worked against the Tier I brands in May."

Northcoast and Mitchell remain encouraged because the Tire Demand Index has been flat or in expansionary territory in 38 of the last 44 months.

"This favorable trend is consistent with our thesis that the U.S. market is still in a volume recovery cycle despite weak trends since the start of the year," he adds. As a result, Northcoast is reiterating its Buy rating (and $40 price target ) for Goodyear shares, and remaining Neutral on Cooper Tire and Monro Muffler shares, respectively.

The monthly Tire Demand Index is a proprietary measure designed to gauge the strength of retail demand for replacement consumer tires in the U.S.