Goodyear Defends Surprise Earnings Disclosure As Shares Fall Further
October 29 2009 - 4:35PM
Dow Jones News
A day after a surprise comment on a conference call sent
Goodyear Tire & Rubber Co.'s (GT) shares down more than 20%,
the company's finance chief defended the way it handled the
disclosure that profit in the North America divison would fall.
Investors and bank analysts were expecting better fourth-quarter
results because Goodyear had cut costs significantly and a
gradually recovering economy held out the promise of a pickup in
business.
Goodyear Chief Executive Officer Robert Keegan began Wednesday's
routine analyst conference call with an upbeat assessment of the
company's health. It wasn't until almost midway through the call
that the company revealed reduced financial expections for its key
North America unit.
Thursday, Darren Wells, Goodyear's chief financial officer, said
the company simply decided to "provide additional clarity on our
businesses" during the call.
"We are committed to strong disclosure," Wells said in an
interview with Dow Jones Newswires.
The thrust of Goodyear's surprise disclosure was that North
America earnings will fall between $75 million and $125 million in
the fourth quarter compared with the third.
The stock was punished almost immediately as some investors and
analysts were expecting sequential growth. Goodyear, based in
Akron, Ohio, is North America's largest tire maker.
"The information we provided was not anything different than
what we have said in the past," Wells said. "There was some
incremental changes based on what we saw going ahead."
Goodyear says the current quarter's main difficulties include
commercial truck tire production operating at only 41% of capacity,
and rising overhead costs.
What perplexed the market was that Goodyear had aggressively cut
jobs and had generally been pointing to a recovery.
Bank of America/Merrill Lynch analyst John Murphy downgraded the
stock to "underperform" and slashed his 2009 earnings forecast to
20 cents a share from $1.23. He also lowered 2010 earnings to 55
cents a share from $1.75.
"Following an okay third quarter, it now appears the
fourth-quarter will be materially weaker than we had expected,"
Murphy said in a research note. He also put the company's stock
target at $10.
JP Morgan analyst Himanshu Patel, saying he remains uncertain
about Goodyear's overhead costs, lowered estimated fourth-quarter
earnings to a loss of 16 cents a share and cut his 2010 forecast to
$1 from $1.50 a share
"After much back and forth yesterday with Goodyear management,
existing and potential holders, and ourselves, we have concluded
that the fourth-quarter weakness is notably the result of cost
timing issues," Patel said in a research note.
Goodyear's earnings press release Wednesday didn't disclose the
extent of its North America shortfall, nor did a set of slides
posted on its Web site. Keegan didn't mention it during the
conference call's opening remarks, focusing instead on the slow
global recovery.
"Overall, the world's economies are showing increasing signs of
recovery, but certainly not as fast, as strong or as consistently
as we'd all like to see globally," Keegan said as the call started.
"Our company's strategy has again proven to be very effective in
2009 through the third quarter, and our performance provides us
with a high level of confidence for the future."
It was CFO Wells who disclosed the fourth-quarter North American
problem on the call. Asked why the information wasn't in the press
release, and why he not Keegan discussed it on the call, Wells said
presenting financial information is usually left to him during such
calls.
"We tend to use the back-and-forth of two-way dialogue to give
additional information, instead of using the press release," he
said.
This is actually the first time Goodyear's current management
has provided in-depth quarterly financial guidance. "As the market
recovery became clearer we got comfortable with our expectations,"
Wells said.
Shares of Goodyear fell as much as 9% Thursday before recovering
somewhat to end down 3.6% at a preliminary $12.97.
KeyBanc Capital Markets analyst Saul Ludwig said he was
maintaining his "buy" rating on the stock.
"I think it was a smart move; had they not hung their dirty
laundry it would be unlikely our analyst fraternity would have
expected poor results," Ludwig said. "Its another period of
disappointment and they got it out on the table and it eliminates
the negative surprise potential."
--By Jeff Bennett; Dow Jones Newswires;
jeff.bennett@dowjones.com; 248-204-5542