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McDonald upgrades Goodyear's stock

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Goodyear Tire & Rubber Co. received good news yesterday when McDonald Investments upgraded its stock from "underweight" to "hold."

Analyst Saul Ludwig cites several reasons for renewed optimism:

* "improved dealer relations that have led to improved market share in (Goodyear's) line of branded tires;

* "surging truck tire business at both replacement and OE;

* "the probability that Goodyear will successfully refinance its debt and use a good chunk of the new money to fortify its pension fund, leading to lower pension expenses in North American Tire;

* "much-improved results outside of North America."

Ludwig predicts that Goodyear's North American Tire unit will break even by the second quarter of 2004 "and begin its march toward a 5% margin, possibly sometime in 2006."

In addition, he believes that Goodyear's restatement of European earnings, currently on hold due to the discovery of accounting problems, will be under $50 million, a "relatively modest" amount.

And a new tire line -- which will be unveiled at Goodyear's dealer meeting in Orlando, Fla., early next month -- should help the company reclaim lost ground. In fact, McDonald officials are calling it "Goodyear's most important product launch in the last 10 years."

Goodyear's ad in the January 2004 issue of Modern Tire Dealer says, "On Feb. 6, 2004, it will be a new day for drivers everywhere. You have our assurance." The word "assurance" was trademarked in the ad. Goodyear officials would not comment on the soon-to-be-unveiled tire line or its name.

"To sum up North American Tire, the organization is in place, the cost cuts have been made, a new product is about to hit the market and the long road to regaining market share has begun," says Ludwig.

Goodyear's next challenge will be liquidity, he adds.

Nealy $2 billion in secured bank obligations will come due in April 2005. Goodyear must refinance that debt by the end of 2004, according to its contract with the United Steelworkers of America, "or else pay each active and retired worker $1,000 and $500, respectively."

As a result, Ludwig predicts Goodyear will try to raise $2 billion in new debt and convertible preferred stock based on the brand equity of Goodyear's flag, Kelly and Dunlop brands and other factors.

"We believe Goodyear's problems are internal and can be fixed. As we see it, Goodyear should be able to raise money."

Goodyear's stock closed at $10.74 yesterday, up from a low of around $3 one year ago.

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