NEW YORK (CNNfn) - Competitor Firestone's well-publicized woes might not be enough to let Goodyear Tire and Rubber Co. live up to its name this year.|
Analysts have been lowering earnings estimates for the nation's largest tire maker, even as Firestone and consumers have been scrambling to replace an estimated 6.5 million tires that are believe to be vulnerable to tread separation failure.
A survey of analysts by earnings tracker First Call has seen the estimate for the third quarter drop to 38 cents a share from 58 cents a share at the beginning of July, and from 42 cents a share in early August, at the time the Firestone recall was announced. The estimate for the fourth quarter is down to 42 cents a share, from 68 cents a share in early July and 46 cents a share at the time of the recall.
"Goodyear has a lot of problems here," said Gregory Kagay, analyst with PaineWebber. "It doesn't surprise me to see numbers coming down."
Since the Firestone recall was announced, Goodyear (GT: Research, Estimates) started plans to ramp up production by 700 percent of the 15-inch tires that can be used as replacements for the recalled Firestone tires. But the company had just finished cutting production before the recall was announced due to what the company said was an exceptionally weak market for replacement tires in July.
"It is too early to measure the full impact of the Firestone recall on our operations," the company said in a recent memo to analysts. "Clearly Goodyear stands to benefit in the short term. However, our ability to increase tire sales in the size being recalled is constrained by our existing tooling capacity. Additional tooling capacity will become available in October."
The company warned analysts recently that higher raw material expenses, mostly oil that is the basic component that goes into tires, as well as a strong dollar that is lowering revenue from sales in Europe and Latin America, is hurting the company's earnings potential at the time that outsiders might expect it to be seeing an earnings bounce.
Further reduction in earnings estimates may be on the horizon, as some analysts say they are waiting to see if August figures are also weak. They say that even with the rush to replace Firestone tires, Goodyear is a long way from getting on track.
"There's plenty of other people who can pick up market share," said Wendy Needham, analyst with Donaldson Lufkin & Jenrette. "And when you think of 6.5 million tires, that's less than one month's production for Goodyear."
Needham said that even if there is a shortage of the 15-inch tire for sport/utility vehicles and light trucks, there is excess capacity for tires overall. And Firestone and its Japanese parent Bridgestone are likely to fight to hang onto market share by keeping prices low, she said, which should prevent tire prices from rising to keep pace with rising raw material costs.
Full-year earnings at Goodyear are now forecast to come in at $1.62 a share, down from the weak $2.12 a share it posted from operations in 1999, and well below the $4.25 a share posted from operations in 1998.
The company had said as recently as February that it expected to hit full-year forecasts of $3.00 a share. The forecast for 2001 now calls for earnings of $2.25 a share.
Goodyear second-quarter tire sales fell by about 600,000 tires, excluding the addition of the Dunlop tires. Goodyear made a $931 million investment last September that gave it controlling interest in Dunlop's North American and European business, which gave it the leading global market share position. Keith Price, spokesman for Goodyear, said that the reduction in prices by some competitors in the face of Goodyear's price increase was primarily responsible for the drop in unit sales.
The company said it believes the Firestone crisis has made consumers more interested in brand quality and safety than they were previously.
"If this trend continues, competitive attempts to gain back market share through price discounting may prove counter-productive and are unlikely to be successful," said the company's recent analyst advisory.
But the analysts say they're not convinced that, even if Goodyear picks up additional sales from consumers fleeing Firestone, they will see a large increase in the bottom line.
"I think there will be costs, such as tooling costs, expedited freight costs and even increases in overtime," said PaineWebber's Kagay. Even if there is a windfall from Firestone, and I'm very concerned about other negatives."
Shares of Goodyear have gained little ground since the Firestone recall was announced. Its shares fell 25 cents to $23.56 in trading Tuesday.
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