Goodyear Earnings in Line, Up Y/Y on Replacement Demand Rise

The Goodyear Tire & Rubber Company (GT) reported a 5.3% rise in earnings per share to 80 cents in the second quarter of 2014 from 76 cents a year ago (all excluding special items). Earnings were at par with the Zacks Consensus Estimate. Net income escalated 7.7% to $225 million from $209 million in the second quarter of 2013.

Including special items, the company reported net income of $213 million or 76 cents per share in the quarter, compared with net profit of $181 million or 67 cents per share a year ago.

Revenues in the quarter fell 4.9% year over year to $4.66 billion, missing the Zacks Consensus Estimate of $4.74 billion. The drop in revenues can be attributed to decline in original equipment unit volume by 4%, primarily in Latin America.

Tire unit volumes increased 3% to 40.6 million in the second quarter of 2014. Replacement tire shipments went up 6% on the back of better performance cross all four regions.

Segment operating income improved 7.5% to $460 million in the second quarter of 2014 from $428 million a year ago. The year-over-year increase was driven by significant improvement in Europe, Middle East and Africa, partially offset by softness in emerging markets.

Segment Details

Revenues at the North America segment dipped 7.1% year over year to $2.04 billion. The deterioration was led by lower third party chemical sales and price/mix. Unit sales augmented 3.4% to 15.3 million units. Original equipment unit volume fell 4% while replacement tire shipments rose 6% year over year.

Revenues from the Europe, Middle East and Africa segment increased 0.2% to $1.58 billion. Revenues benefited from increased tire unit sales and favorable foreign currency translation, which was partially hurt by lower price/mix. Unit sales increased 3.4% to 15.1 million units. Original equipment unit volume was flat while replacement tire shipments went up 4% year over year.

Sales in the Latin America segment fell 7.9% to $489 million due to unfavorable foreign currency translation and a fall in tire unit volumes, partially offset by improved price/mix. Unit sales decreased 2.2% to 4.4 million units. Original equipment unit volume was down 33% owing to a weak performance in Brazil while replacement tire shipments improved 13% year over year.

Revenues from the Asia-Pacific segment fell 7.2% to $543 million due to lower price/mix and unfavorable foreign currency translation. The upside was partly offset by an increase in tire volume to 5.8 million units. Original equipment unit volume was up 6% and replacement tire shipments went up 4% year over year.

Financial Position

Goodyear had cash and cash equivalents of $1.6 billion as of Jun 30, 2014, down from $3.0 billion as of Dec 31, 2013. Long-term debt and capital leases amounted to $6.8 billion as of Jun 30, 2014, against $6.2 billion as of Dec 31, 2013.

Cash used in operations in the first half of 2014 increased to $1.1 billion from $462 million in the year-ago quarter. Meanwhile, capital expenditure stood at $441 million compared with $493 million in the same period a year ago.

Dividend

Goodyear paid a quarterly dividend of 5 cents per share on Jun 2, 2014. The company also declared a quarterly dividend of 6 cents per share payable on Sep 2, 2014 to shareholders of record as on Aug 1, 2014.

Stock Update

Goodyear repurchased 1.15 million shares at an average price of $26.56 during the quarter under its previously announced $450 million share repurchase program.

Guidance

For the period 2014–2016, Goodyear expects annual segment operating income to increase 10–15%. The company also targets achieving positive free cash flow over this period. Moreover, Goodyear expects a 2–3% increase in unit volumes in 2014.

Goodyear Tire is one of the largest tire manufacturing companies in the world. The company currently retains a Zacks Rank #4 (Sell).

Some better-ranked stocks that are worth considering in the auto sector include Visteon Corporation (VC), Magna International Inc. (MGA) and Cooper Tire & Rubber Co. (CTB). All the stocks sport a Zacks Rank #1 (Strong Buy).

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