Goodyear to Buyback Senior Notes - Analyst Blog

Goodyear Tire & Rubber Company (GT) announced its offering to buyback $973 million in senior notes on September 29, 2010. The notes are $388 million in principal amount of 7.857% senior notes due August 15, 2011, $325 million in principal amount of 8.625% senior notes due December 1, 2011, and $260 million in principal amount of 9% senior notes due July 1, 2015.

Goodyear has indicated its buyback plan at the time of issuing $1 billion aggregate principal amount of its 8.25% senior unsecured notes, due August 15, 2020, in the middle of this month. The 2020 notes were issued in two phases, $900 million and $100 million. The company intends to fund the debt buyback with the net proceeds from the issuance of 2020 notes.

In the second quarter of the year, Goodyear saw a profit of $31 million or 12 cents per share (excluding special items), in sharp contrast to a loss of $240 million or $1.00 per share (excluding special items) in the same quarter a year ago.

The company has significantly exceeded the Zacks Consensus Estimate of a profit of 4 cents per share during the quarter. The higher profit was led by an impressive rise in tire unit volume, particularly in the company’s North American Tire segment, during the quarter.

Sales during the quarter grew 15% to $4.5 billion, higher than the Zacks Consensus Estimate by $120 million. This reflected a positive impact of $304 million led by a 10% increase in tire unit volume due to a strong global demand.

Sales were also boosted by $161 million from higher sales in other tire-related businesses, mainly third-party chemical sales in North America, and by better price and product mix. These were partially offset by an unfavorable foreign currency translation effect of $37 million.

We are optimistic about Goodyear’s cost-saving actions. The company has succeeded in achieving cost reductions of $2.5 billion by 2009 and has also targeted an additional $1 billion of gross savings by 2012. In addition, the company will benefit from its focus in the emerging markets of Latin America, Eastern Europe and Asia.

However, Goodyear faces pricing pressure from original equipment manufacturers due to weak industry demand. Further, its highly-leveraged balance sheet is worrisome. As a result, Goodyear maintains a Zacks #3 Rank (Hold) rating for the short term (1–3 months) and Neutral recommendation for the long term (6+ months).
 
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