AKRON (July 7, 2004) — In a move the analyst himself calls “admittedly risky,” a JPMorgan analyst has upgraded his recommendation on Goodyear's stock to buy.
“In a contrarian and admittedly risky call, we upgrade Goodyear to overweight from underweight as we see significant near-term upside potential in this out-of-favor name,” analyst Himanshu Patel wrote in an equity research report.
Mr. Patel said his upgrade reflects improving industry factors, reduced balance sheet risks and a possible end to the Akron-based tire maker's accounting troubles. He also cites positive factors such as favorable June shipments in the industry and a potential sale of Goodyear's chemical business. Mr. Patel also called raw materials increases “manageable.”
“We ultimately believe that Goodyear will be able to mitigate the increase in raw materials costs through continuous cost cuts and mix improvements,” he wrote in the note to investors.
Mr. Patel also said he is confident Goodyear will be able to manage its nearly $4 billion in debt, assuming operating fundamentals either remain stable or improve. The analyst expects North American Tire, which improved its segment operating loss in the first quarter from the year-ago period, will post a modest profit in the second quarter.
“The main downside risk is a faster than expected increase in raw materials costs and a faster than expected increase in interest rates,” Mr. Patel cautioned, adding his outlook also could be changed by volume or pricing growth moderating.
On July 6, when the note was released, Goodyear's stock closed at $9.52, up from $9.33 on July 2.