Goodyear profit beats estimates, shares jump

A Goodyear tire shop in a file photo. Goodyear posted a quarterly profit on Friday as price hikes and increased sales of more expensive tires offset rising raw materials costs and a slowing U.S. economy. (REUTERS/Joshua Lott)

DETROIT (Reuters) - Goodyear Tire & Rubber Co <GT.N> posted a stronger-than-expected quarterly profit on Friday, driven by price hikes, sales of more expensive tires and favorable foreign exchange rates, sending its shares up 7 percent.

Goodyear, the largest U.S. tiremaker, said the slowing U.S. economy remained a concern, but it was on track to meet long-term cost-cutting goals.

The company sold fewer tires worldwide due to weak demand from vehicle manufacturers in North America and from consumers in North America and Europe, but its average revenue per tire rose 7 percent over a year earlier in constant currency terms.

Softening consumer demand was mainly in lower-priced tires that produce lower profits. Goodyear said it had not seen evidence of consumers trading down to less expensive tires.

"On balance, our view of Goodyear's performance for the quarter is highly positive," Calyon Securities analyst Mark Warnsman said in a note to clients.

Warnsman said raw material cost increases "remain a valid and ongoing concern," but he pointed to Goodyear's ability to more than cover those costs so far.

Goodyear reported first-quarter net profit of $147 million, or 60 cents per share, compared with a net loss of $174 million, or 96 cents per share, a year earlier. Sales rose 9.8 percent to $4.94 billion.

Goodyear earned 67 cents per share excluding one-time items. On that basis, analysts, on average, expected 48 cents per share, according to Reuters Estimates.

Foreign currency translation added $341 million to sales and $27 million to operating income, Goodyear said.

NORTH AMERICAN VOLUME DOWN

Price increases and a sale of a higher percentage of more expensive tires added $157 million to operating income.

A price spike on raw materials late last year has not yet fully struck the tire maker, which expects raw materials costs to have a more significant impact as the year progresses.

North America, its largest unit, reported operating income of $32 million, compared with a loss of $20 million a year earlier. Sales declined 1 percent to $2 billion, but margins improved.

Tire unit volume was down nearly 8 percent to 17.8 million tires in North America in the quarter, mainly because of lower shipments to vehicle manufacturers.

"On balance, we were disappointed with (North America)," JP Morgan analyst Himanshu Patel said in a note to clients. He said international operations were responsible for the company exceeding JP Morgan's forecast.

Patel said weaker sales of consumer tires to both vehicle manufacturers and the replacement market in North America was a potential concern.

In the past, Goodyear has said lower sales to manufacturers had a neutral to positive impact because the company could shift those tires to the replacement market where it makes higher margins.

The company has raised prices to more than cover rising costs for raw materials, such as natural rubber and petroleum-based synthetic rubbers. It expects those costs to rise 7 percent to 9 percent for the year.

Tiremakers have eliminated significant production capacity in North America in recent years, giving them room to cope with declines in tire shipments without resorting to price cuts.

Goodyear's strategy has been to sell more expensive, higher-margin brands in North America, which has helped offset reductions in mostly low-margin tire sales to vehicle manufacturers.

Goodyear shares were up $1.95 to $29.20 in morning trade on the New York Stock Exchange after rising as high as $30.10 earlier in the session. In the first three months the year the shares fell 8.6 percent, while the Dow Jones U.S. automobiles and parts index <.DJUSAP> dropped 12.25 percent.

(Reporting by David Bailey; editing by Jeffrey Benkoe and John Wallace)

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