The Zacks Analyst Blog Highlights: Goodyear Tire & Rubber, Delta Air Lines, United Continental Holdings, AMR and Southwest Airlines

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Oct 31, 2011, 09:30 ET

CHICAGO, Oct. 31, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Goodyear Tire & Rubber Company (NYSE: GT), Delta Air Lines (NYSE: DAL), United Continental Holdings Inc. (NYSE: UAL), AMR Corp. (NYSE: AMR) and Southwest Airlines (NYSE: LUV).

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Here are highlights from Friday's Analyst Blog:

Goodyear Beats, Profit Jumps

Goodyear Tire & Rubber Company (NYSE: GT) reported a profit of $161 million or 60 cents per share in the third quarter of 2011 in sharp contrast to a loss of $20 million or 8 cents per share in the same quarter of 2010.

Excluding special items, profits leapt to $195 million or 72 cents per share from $32 million or 13 cents per share in 2010 quarter. It was significantly higher than the Zacks Consensus Estimate of 25 cents per share. The increase in profit was attributable to improved price/mix and the sale of the company's new and innovative products.

Sales went up 22% to $6.1 billion on flat tire unit volumes of 47.7 million. However, it was lower than the Zacks Consensus Estimate of $6.2 billion. Sales and profits (non-adjusted) were highest ever achieved by the company in any quarter.

Sales in the quarter were positively impacted by strong price/mix, increase in sales in other tire-related businesses (primarily chemical sales in North America), and favorable foreign currency translation of $175 million.

Segment operating income was $463 million in the third quarter, up $229 million from $234 million in the year-ago period. It was favorably impacted by improved price/mix of $739 million, which more than offset by $506 million in higher raw material costs (net of raw material cost reduction actions).

Company Outlook

Goodyear expects the global tire industry to continue to grow in full year 2011. In North America, the company expects the consumer replacement industry to be flat, consumer original equipment to grow 6%, commercial replacement to go up 13% and commercial original equipment to surge 50%.

In Europe, the consumer replacement industry is expected to grow 4%, consumer original equipment to rise 5%, commercial replacement to increase 1% and commercial original equipment to soar 50%.

Goodyear anticipates raw material costs for the fourth quarter of 2011 to increase more than 30% percent compared with the prior year; With this, raw material costs for the full year is expected to increase by 30% over 2010.

Our Call

Goodyear Tire & Rubber Company is one of the largest tire manufacturing companies worldwide, selling its products under the Goodyear, Kelly, Dunlop, Fulda, Debica, Sava and various other "house" brands as well as private-label brands.

On a worldwide basis, there are two major competitors for Goodyear – Bridgestone, Japan, and Michelin, France, who command about 55% of the global market together. Goodyear retains a Zacks #2 Rank, which translates to a rating of Buy for the short term (1 to 3 months).

Delta Soars in 3Q

Delta Air Lines (NYSE: DAL), the second largest U.S. airline, has reported third quarter adjusted earnings per share (EPS) of 91 cents that matched the Zacks Consensus Estimate. On a GAAP basis, earnings shot up 51% to 65 cents from 43 cents in the year-ago quarter.

Despite the surging fuel prices, the year-over year upswing was driven by aggressive fare hike actions, cost-cutting measures and unbundled offerings such as upgraded seats.

Revenue

Revenue climbed 10% year over year to $9.82 billion and was above the Zacks Consensus Estimate of $9.75 billion. Airlines traffic, measured in billions of revenue passenger miles, was flat year over year. Capacity or available seat miles inched down 1% and load factor (percentage of seats filled with passengers) grew 20 basis points year over year to 86.1%.

On an annualized basis, Passenger, Cargo and Other revenues increased 10%, 13% and 5%, respectively, in the reported quarter. Passenger revenue per available seat mile (PRASM) rose 11% year over year, led by a 13% jump in PRASM in Latin America and a 12% domestic hike.

Operating Expenses

Total operating expenses increased 13% year over year in the third quarter. Most of the increase was due to fuel expenses, which were up 42% from the year-ago quarter. Increased capacity and revenue-related expenses as well as currency translation were responsible for the rise.

Consolidated unit cost or cost per available seat mile (CASM), excluding fuel and special items, increased 3.3% and CASM, including fuel and special items, grew 13.5% year over year in the reported quarter.

Liquidity

Delta Air Lines continues to enjoy a solid balance sheet. At the end of the third quarter, the company had $5.1 billion in unrestricted liquidity including $3.3 billion in cash and $1.8 billion in undrawn revolving credit facilities.

The company reduced its adjusted net debt to $14 billion from $14.5 billion at the end of fiscal 2010. Delta Air Lines is on track to reduce its net debt to $10 billion by 2013.

The company generated operating cash flow of $100 million in the reported quarter. Capital expenditures were $220 million.

Guidance

For the fourth quarter, Delta Air Lines expects operating margin in the range of 5–7% and consolidated unit cost, excluding fuel, to grow 2% year over year. The estimated fuel price, including taxes and hedges, is approximately $2.98 per gallon and total liquidity is projected at $5 billion.

Our Analysis

We expect Delta Air Lines to be profitable on increasing fares, reducing capacity, ancillary revenues, expansion into new and untapped markets as well as hedging strategies. In addition, the company is trying to lower costs through job cuts and reduction in non-fuel expenses as well as by retiring 140 aircraft, which will generate $250 million in savings.

However, we are concerned about steeply rising fuel prices, unionized labor, the current debt loaded balance sheet and competitive threats from its large peers such as United Continental Holdings Inc. (NYSE: UAL), AMR Corp. (NYSE: AMR) and Southwest Airlines (NYSE: LUV) that are restraining the upside potential of the stock.

We are currently maintaining our long-term Neutral rating on the stock. For the short term (1–3 months), the stock retains a Zacks #2 (Buy) Rank.

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