Thursday, October 29, 2009

Goodyear beats earnings estimates, stock is pummeled (GT)


Goodyear Tire (GT) came in ahead of revenue and earnings expectations yesterday morning, yet the stock traded down almost 20% on the day. The selloff continued today, with the stock falling another 3% today on a B0fA downgrade, down significantly from the 18.00 level from last Friday.

What spooked, if not enraged, investors, was management guiding to a North American segment operating loss for the 4th quarter, after eeking out a profit in Q3:

From the call:

"In North America we expect Q4 segment operating income to be down approximately $75 to $125 million compared with Q3 reflecting first the impact of seasonal trends on unit sales and reduced activity from our other tire related businesses; second sequentially higher raw material costs compared to Q3; and third, timing of recognition of unabsorbed fixed costs related to production cuts, which is an adverse impact compared with Q3. Again Quarter 4 is essentially in line with our plan for 2009."

"Unabsorbed fixed costs" is what had people scratching their heads. On the one hand, GT was bragging about the huge cost savings they'd achieved year to date. Then on the call they say that North American segment would go from a slight profit to a hundred million dollar loss to to extra employees sitting around. Inconsistent to say the least.

Disappointment over the guidance is warranted, but the stock may have over-reacted. Management said that overseas performance would be quite similar to Q3, and a look at those results showed Asia and Latin America did a hell of a job picking up where North America left off.

The stock's massive move off the $4 level in March probably included some extra optimism that was dashed by 4th quarter guidance.

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