AKRON (Mar. 9, 2000)—The stock market´s current mania for Internet and technology-related securities seems to have afflicted tire makers´ share prices with the same buyer apathy plaguing those of other so-called "old-economy" companies.
Losers outnumbered gainers by more than two to one on Tire Business´ list of March 1 closing prices, with shares of the two largest U.S.-based companies—Goodyear and Cooper Tire & Rubber Co.—selling at five-year lows.
Goodyear shares, which were selling for $60.75 just last May, closed at $21.66—down 23.2 percent from their year-end 1999 price.
Likewise, Cooper shares, which sold for $22.88 on May 1, dipped 31.9 percent during the recent January-to-March period to close at $10.56.
Along with buyer neglect, some media pundits also blamed the decline in Cooper´s stock on disappointment with the company´s forth-quarter 1999 financial results which fell below some analysts´ expectations, additional indebtedness taken by the company on to finance its recent non-tire acquisitions and the planned June 1 retirement of Chairman and CEO Patrick Rooney.
Meanwhile, the price of Pacific Dunlop shares, which suffered the third-greatest price decrease during the January-March period, also fell 26.9 percent to close at 96 cents (U.S.).
Among the 19 company stocks on TB´s list, the prices of 13 were down from year-end 1999 levels, the average decline amounting to 13.8 percent.
Securities analyst Rod Lache, of Deutsche Banc Alex. Brown in New York, which initiated research coverage of Goodyear and Cooper just this month, assigned a "market perform" initial rating to the two companies´ stocks—meaning their performance will parallel that of the tire industry at large.
However, Mr. Lache acknowledged that the industry itself is hardly a utopia for wealth-seeking investors. Industry consolidation in North American has not brought with it the financial benefits for surviving manufacturers might be expected to realize from such a concentrated oligopoly.
Many industries, he said, experience improved financial results through stronger pricing and increased operating leverage as they grow more concentrated—and many stock investors have been hoping this will occur in the tire industry over time. "Unfortunately," he said, "there is little tangible evidence that this is occurring at this time."
Mr. Lache said tire manufacturers face a three-fold challenge in their quest for more favorable pricing and increased profitability—namely, that:
1) Tires are seen by buyers as a commodity purchase, thereby making it difficult for an individual company to raise prices;
2) Too much tire manufacturing capacity exists; and
3) There is a likelihood that tire maker´ margins will be further squeezed by the increased cost of petroleum-based raw materials, which make up between 40 and 50 percent of the cost of sales, he said.
The combination of the near-term risk of raw material price increases, the cost of integrating recent company acquisitions, new purchasing schemes such as on-line reverse auctions on the part of auto makers and other volume tire buyers as well the auto makers´ recent entry into the tire aftermarket "are likely to keep a lid on" tire makers´ stock valuations in the near term, Mr. Lache predicted.
In the case of Goodyear and Cooper stock, "the good news," he said, "is that both companies have strategies in place to correct their problems. The bad news is that Wall Street is not necessarily going to believe it unless they see it."
Nevertheless, if the two companies come through with the kind of turnaround they´ve been promising, their stocks could hold "significant upside potential," he said.
Veteran analyst Raymond J. Mucci, with Baird, Patrick & Co. in New York, agreed that too much tire production capacity exists on a worldwide basis.
"That´s why they (tire makers) never seem to make a price increase stick," said Mr. Mucci, who worked for Uniroyal prior to becoming a stock analyst and has been observing the tire industry for more than 35 years in all.
Rising interest rates could be one factor, Mr. Mucci said. However, he believes lack of investor interest is much to blame for the depressed prices of tire company stocks.
Mr. Mucci said most of the new money entering the stock market these days is going into Internet and tech issues, which some observers have labeled the "new economy." Tire makers, on the other hand, are seen by investors as "old-economy companies." Therefore their stocks are languishing.
In light of this, the currently distressed prices of some tire company stocks might be a buying opportunity, Mr. Mucci said.
By far the greatest gainer on TB´s March 1 stock listings is Yokohama Rubber Co., whose share price over the last two months has soared 53.7 percent amid reports in the Japanese news media that Group Michelin might be about approach to approach it with an offer to form an alliance.
Both tire makers quickly to dismissed such reports as unfounded. However, half way around the world, the German newspaper Frankurter Allgemeine Zeitung, also published an early March article quoting Michelin Chairman Edouard Michelin as saying the French tire maker aims to raise its share of the Asian market from 7 to 19 percent within five years—possibly by establishing partnerships with Asian-based tire makers such as Yokohama or Toyo Tire & Rubber Co. of Japan or South Korea´s Woosung Tire Co.
The newspaper said the Michelin Chairman declined to give details on such negotiations.
Other gainers on TB´s stock list included Titan (+15.4 percent), Bridgestone (+5.6 percent), Nokian (4.2 percent) Toyo (+1.6) and Sumitomo (+1.3 percent).