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Ludwig: Prospects look bright for Goodyear

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Another tire manufacturer based in the United States, another "Buy" by analyst Saul Ludwig.

Fresh off his report on Cooper Tire & Rubber Co. (see "Ludwig: Prospects are bright for Cooper Tire"), Ludwig, managing director for KeyBanc Capital Markets, reinforces a "Buy" rating for Goodyear Tire & Rubber Co. stock.

He outlined a number of "compelling reasons" for his recommendation.

1. Third-quarter 2009 "appears to be the inflection point as prior quarter earnings turn to profits," he says. "The 3Q09 conference call should be decidedly upbeat."

2. Major capacity shrinkage likely will lead to higher operating rates and a reduction in unabsorbed overhead costs.

3. A sharp strengthening of currencies in Europe and Latin America will likely add to earnings prospects.

4. New products have been well received by dealers.

5. Goodyear's long-term market share erosion is reversing.

6. Because Goodyear follows FIFO (first in, first out)  accounting principles, it will have very low raw material costs beginning in 3Q09 and lasting through 1Q10. "A new price hike announcement is likely soon to cover recent increases in raw material costs."

7. Under the new labor contract, there is no defined benefit pension plan for new hires. "Also, having no general wage increase for the life of the four-year contact, and the Union City (Tenn.) plant being unprotected are some of the pluses for the company."

Ludwig adds that there should be higher plant utilization as capacity continues to be rationalized.

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