Ludwig puts 'Hold' on Goodyear stock, in part due to overhead costs

Sept. 11, 2008

Saul Ludwig, managing director of KeyBanc Capital Markets Inc., is revising his earnings per share (EPS) estimate for Goodyear Tire & Rubber Co. downward.

From June to August, Ludwig increased his 2008 estimate from $2.00 to $2.20. The revised EPS estimate is $1.90. "For 2009, we are lowering our estimate by 30 cents to $2.30."

Subsequently, KeyBanc is reducing its rating for Goodyear stock from "Buy" to "Hold," according to Ludwig.

"Strategically Goodyear is doing several right things -- cutting high cost capacity, VEBA (Voluntary Employee Benefit Association), enriching its mix and investing in automation -- but external forces and competitive dynamics make it difficult to achieve full earnings potential until at least 2010, in our opinion."

Ludwig says the results are impacted by Goodyear's reduction in tire production -- eight million fewer units in North America and five million less (including high margin truck tires) in Europe. "In a capital intensive business, unabsorbed overhead costs are substantial, and it is those costs that have driven estimates lower.

"With oil prices and gasoline prices receding, raw material costs may come down and tire demand should eventually improve. Those are certainly positives for 2009, but unless tire demand -- for both the industry and for Goodyear -- improves substantially, Goodyear will have too much capacity and unabsorbed costs that could linger into 2009."