The Goodyear Tire & Rubber Company (GT), Cooper Tire & Rubber Company (CTB): Are Tire Makers in for a Big Deflation?

Page 1 of 2

The past 12 months have been pretty good for the tire market and for those who had invested in it. Shares of passenger and light truck tire makers like The Goodyear Tire & Rubber Company (NASDAQ:GT), Bridgestone Corp (TYO:5108), Michelin, Cooper Tire & Rubber Company (NYSE:CTB), and General are all up around 50% to 75% over last year at this time.

The Goodyear Tire & Rubber Company (NASDAQ:GT)

The boom is largely a result of increased auto sales around the world — with the notable exception of Europe — and stability in rubber prices. But what looks to be a moderation in U.S. vehicle purchases, coming at the same time the market is being flooded with cheap new tires from China, could strain sales and cut profitability in the near term.

Things had been rolling along nicely

As it helped stabilize the U.S. economy, the auto industry’s recent rebound here has also helped sell a lot of tires. Americans bought 14.5 million cars and light trucks last year, up 45% from the market’s bottom in 2009. And thanks to an improving economic picture and increased access to credit, sales have been annualizing at an even brisker pace so far this year.

Not surprisingly, tire makers who supply original equipment to automakers have seen a solid spike in sales as a result. But the improved mood and increased activity have also raised demand for higher-margin replacement tires. Combined with weak prices for natural rubber — the biggest cost in producing tires — the sector has soared.

Potential headwinds began to appear earlier this year, though, as weakening demand during the first quarter proved a challenge for several tire makers. The Goodyear Tire & Rubber Company (NASDAQ:GT) and Cooper, for example, each reported that revenue for the period fell about 12.5% from the prior year. Michelin’s first-quarter sales dropped more than 8%. Hankook fell nearly 2%. Even Bridgestone, which has much less exposure to Europe’s troubles, saw only a slight increase.

Despite the negative turn, however, profits held better than expected because rubber prices declined. Cooper reported a record first-quarter operating profit and net income that more than doubled, attributing both to raw material costs falling by $90 million during the quarter. The Goodyear Tire & Rubber Company (NASDAQ:GT) posted higher operating and net income for the same reason. Bridgestone and Hankook also reported increases in profits while Michelin — hit hardest by declines in Europe — said it expects “stable operating income” due to favorable raw material prices.

Slower U.S. auto sales could further depress demand

But, some observers have started to suspect American car sales may not cooperate as much going forward. Ford Motor Company (NYSE:F), Chrysler, and Nissan Motor Co., Ltd. (ADR) (OTCMKTS:NSANY) were all up solidly month over month in May, but General Motors Company (NYSE:GM), Honda Motor Co Ltd (ADR) (NYSE:HMC), Toyota Motor Corporation (ADR) (NYSE:TM), and Hyundai saw only minimal increases and Volkswagen actually declined.

Even more worrisome, the overall pace for the month was only slightly above the average for the first four months of the year. This indicates growth has slowed.

Page 1 of 2

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The World’s Most Famous Circuses

Best Hair Stylists

Most Popular NASCAR Drivers

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!