KeyBanc maintains its 'Hold' rating on Goodyear stock

Nov. 27, 2008

KeyBanc Capital Markets is maintaining its "Hold" rating on Goodyear Tire & Rubber Co. stock despite a challenging business environment.

"While Goodyear points to cumulative savings approaching $1.6 billion from its four-point program, it is not possible to see those savings on its bottom line, as all have been eaten up by lower volume, unabsorbed overhead, inflation, transitional manufacturing costs and a host of other expenses," says KeyBanc Managing Director Saul Ludwig.

He estimates sales of 70 million units in North America in 2008 (compared to 116 million tires in 2000).  "As retail sales are soft, many dealers are slashing inventories in the fourth quarter, even as Goodyear has increased promotional support to try to motivate dealers to buy. But as most expect lower tire prices next year, there is a reluctance to buy more now."

Ludwig predicts raw material costs will fall in 2009; as they do, the average price of a tire could fall by 5% or more. "This is consistent with what we heard at the SEMA Show we attended earlier this month."

During Goodyear's third-quarter 2008 conference call, Chairman, CEO and President Bob Keegan "indicated that one of the ways he plans to offset currency weakness would be to increase prices in local currencies, especially in Latin America," according to Ludwig.

"Given soft demand, falling raw material costs and excess capacity, we do not believe it will be possible to raise prices; in fact, the company may even go lower as capacity utilization in the industry falls."

Ludwig says despite challenging conditions, Goodyear "has adequate liquidity to sustain operations, as we agree with management that the recent downgrade of Goodyear's debt by S&P was unwarranted.

"While Goodyear has a sound long-term strategy... the external environment has deteriorated such that some modifications in its tactical plan to achieving its longer term goals might need to be made."

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