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KeyBanc's Ludwig says more raw material cost increases are on their way

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"Big" raw material increases are coming in July, according to Saul Ludwig, managing director for KeyBanc Capital Markets Inc. In preparation, many tire manufacturers are raising prices.

Will the prices stick? They have to, says Ludwig.

"Over the last few weeks, every tire manufacturer has announced tire price increases of up to as much as 10% -- but most announced hikes of up to 8% -- to take effect either June 1 or July 1," he says.

"With raw materials representing about 35% of the selling price, those increases need to stick to mitigate coming raw material increases."

(Ludwig says most of the key raw materials used by tire makers are reset quarterly, although some change monthly.)

Because Goodyear Tire & Rubber Co. follows the FIFO (first in, first out) accounting system and Cooper Tire & Rubber Co. follows the LIFO (last in, first out) system, Goodyear is better able to keep up with the cost increases, according to Ludwig.

"While (FIFO vs. LIFO) is merely a technical accounting issue and has little to do with actual cash flow, it certainly does impact reported EPS (earnings per share) and, no matter how one tries to explain away that difference, it does impact stock price performance.

"On the other hand, if raw materials were to reverse and head lower, Cooper could potentially post much better comps than Goodyear in (its) respective North American operations." (Both companies use FIFO for their international reporting.)

KeyBanc's rating on Goodyear's stock remains "BUY," while its rating on Cooper's stock is "HOLD."

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