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Ludwig: Pricing is right at Goodyear

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Tire industry analyst Saul Ludwig maintains his "BUY" stock rating on Goodyear Tire & Rubber Co. He describes the company's handling of rising raw material costs as "masterful."

Ludwig, a managing director at Northcoast Research Holdings LLC, is one of a number of analysts to reduce his previously announced earnings per share (EPS) estimate for this year.

"Many Goodyear followers have cut estimates for Goodyear for 2011 to what we believe are too low levels," he says. "We are more optimistic based on our detailed review of what is known and Goodyear’s history of muting the impact of rising raw material costs.

"As such, we maintain our positive view on Goodyear for 2011 and 2012 while still recognizing some longer term concerns."

Goodyear will largely complete its planned exit of 25 million units of high cost capacity this year, he says. (See "Analyst Saul Ludwig comments on plant closure.")

"With the exception of the uncertainties related to its price/cost spread, most other variables are pointing in a positive direction this year. Cost reduction projects should save at least $250 million, unabsorbed overhead should be better by at least $175 million and volume growth should add over $100 million. Those will be offset with inflation, planned increases in SG&A and new plant start up costs in China.

The profit impact from higher truck tire sales also would be a positivie.

"With truck tire demand surging ahead globally coupled with modest growth in consumer tires, Goodyear will be able to run its plants at a high level, thus meaningfully lowering its unabsorbed overhead," he adds.

Goodyear posted a net loss of $216 million on net sales of $18.8 billion for fiscal 2010 (see "Goodyear announces financial results, plans to close plant").

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