Dear Mr. Berko:

Please tell me what you think about my buying 200 shares of Goodyear Tire. I used to own the stock way back in the mid-’80s and sold it for a loss in 1991. I think it’s time for Goodyear to recover, and one of my acquaintances who works there tells me that the company is in a great turnaround mode. What do you think?

W.E., Wilmington, N.C.

Dear W.E.:

I’ve been a Goodyear Tire & Rubber Co. (GT-$14.01) bear since I sold my 200 shares at $75 in mid-1998, after some of my rear tire rubber left the road without permission. I sold Goodyear Tire not because I believed the stock price was too high, but because I was mad at management for refusing to acknowledge that its tire was defective. I was just dumb lucky.

However, I’ve recently become a GT bull and believe the stock is on track to hit $30 a share in the next few years. After a string of five losing years, including a $3 billion loss in 2003, the GT people might have succeeded in overhauling this company for success.

Earnings for 2006 (even with raw material costs up 17 percent) should be in the area of $1.60 to $1.65 per share. The tire market is growing about 2.8 percent a year, and worldwide shipments have been up nicely, due to strong demand for commercial trucks and buses in Europe and Latin America. Revenues for 2006 are expected to rise 5 percent from last year, and net profit margins should increase to 1.6 percent from 1.3 percent last year.

Management is making a strong effort to source more of its raw materials and finished goods from China. In the next few years, GT intends to source about 15 percent of its work to China, where raw materials are about 40 percent cheaper and labor is nearly 80 percent less. In fact, Goodyear is building a large plant in China and expects that its Chinese connections will increase net profit margins by as much as 20 percent.

GT’s management will be selling its non-core businesses in order to focus on tires. GT will sell its engineered products segment, and the billion-plus dollars it expects to derive from this sale will be used to reduce its sizable $4.3 billion debt.

GT’s turnaround strategy that began in earnest a few years ago should now provide annual savings in excess of $500 million, with even better numbers to come. In December, the company completed the sale of its North American farm tire assets to Titan International Inc. for $100 million. Late last year, GT sold its adhesive resin businesses as well as its rubber plantations in Indonesia.

However, GT’s plans are not just about trimming down. In January, the company announced that it had acquired Ansell Ltd.’s interest in South Pacific Tyres, which is a $700 million revenue tire manufacturer in New Zealand and Australia, giving it full ownership of the company.

Things are looking up for Goodyear. The cyclical rebound in tire demand has allowed the company to raise prices and maintain (and even increase) its margins.

Sales of ultra-high-performance tires, designed for high speeds, grew by 14 percent last year, and demand for just plain old high-performance tires grew by 6 percent. These two tire categories accounted for 12 percent of GT’s revenues in 2000 but were 22 percent of revenues in 2005.

Various groups have jazzed up their rides with ridiculously expensive rubber. GT seems to own 22.5 percent of this growing tire market.

February’s Consumer Digest gave GT a real boost. Goodyear tires earned the top “Best Buy” rating in three out of five categories: Not bad for a company that in 2003 looked as if it was a candidate for the 11th Chapter.

I’d buy 200 shares quick as a blink. Deutsche Securities recently downgraded GT to a sell, but Saul Ludwig at KeyBanc placed a $22 target price for this stock in 2006 and Peter Hanenshu of J.P. Morgan gives GT a solid four-star rating. I think there’s a lot of tread left on this stock’s price, so three out of four recommend that you go for it.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

© Copley News Service