Shane Ingram, Contributor
Peter Graham, managing director and board member of Goodyear Jamaica Limited.
GOODYEAR AND Courts Jamaica reported favourable corporate earnings this week. Despite the downturn in the local retail sector, profits at Goodyear spiked 87.2 per cent in the final quarter to end a very successful financial year that saw profits climb 46.74 per cent. Similarly, Courts Jamaica Ltd, the Island's largest furniture and appliance retailer, earned 10.5 per cent more in the quarter to December 2005, which pushed the growth in YTD profits to 20.24 per cent. Meanwhile, Salada Foods continued to suffer from tight trading conditions as profits inched ahead 5.5 per cent in Q1 2006.
COMPANY SPOTLIGHT: GOOD YEAR FOR JAMAICA'S LARGEST TYRE RETAILER
Anchored by its strategies to achieve double-digit growth in revenues; restrain selling, administration and distribution (SAD) costs to less than 10 per cent of revenue; and maintain operating margin between 9.2 per cent and 9.50 per cent, Goodyear Jamaica Limited posted a 46.7 per cent jump in profits for the year ended December 2005.
Turnover peaked at $1.18 billion, having grown 12.7 per cent in the year. Although local sales provided the lion's share of sales at $736 million or 62.5 per cent, it was exports that fuelled the upturn in sales having shot up 30.8 per cent to $442 million for the year. The strong export earnings at Goodyear reflected the benefits of the new markets penetrated in the Eastern Caribbean as well as increased business in its traditional export markets. Meanwhile, both direct and SAD expenses were restrained during the year such that operating margins moved from 5.98 per cent to 8.95 per cent at year-end 2005. Of note was the fact that SAD costs absorbed only 8.8 per cent of sales, down from 9.3 per cent in the prior year and also in keeping with management's objective to keep SAD costs below 10 per cent of sales.
Within this backdrop, operating profits spiked 68.6 per cent to $105.5 million. However, a fall in finance income and a relatively higher effective tax rate combined to deflate growth in net profits to 46.7 per cent. Thus, net profits amounted to $74.6 million or $1.26 per share for the year matched against $50.9 million or $0.86 per share at the end of 2004. The strong earnings performance consequently pushed ROE and ROA to five-year highs of 17.36 per cent and 12.44 per cent, respectively. Goodyear also boasted a debt-free capital model, which complemented its favourable liquidity as indicated by a current ratio of 3.45X.
Given that petro-chemical based materials account for approximately 65 per cent of a standard tyre raw material requirement, Goodyear's perennial business risks arise from its exposure to the volatility of international oil prices. This situation is compounded by the competitive nature of the industry that limits the firm's ability to pass on cost-push pressures. And, although Goodyear is the leading tyre distributor on the island, competition is becoming an increasing concern, especially in light of the fact that the industry remains relatively unregulated.
In response to these challenges, Goodyear has maintained focus on growing its higher value premium line while securing a profitable share of the lower-income segment through its Kelly line. The company also continues to expand its product lines and widen its distribution network on the domestic market. While the bulk of sales will likely accrue to the domestic segment, exports should continue to be the main growth engine in the coming year given Goodyear's pursuit of higher portions of markets in the Eastern Caribbean, Trinidad and Barbados. Goodyear will also likely extend its use of advertising in order to build brand appeal, loyalty, and differentiation in the market, especially in the 'newer' tyre buyers. Although it will be difficult to repeat the growth experience of 2005 in 2006, Goodyear is likely to outperform its listed trading counterparts. In addition, investors can expect close to $0.63 per share in dividends and modest capital gains this year.
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We hold favourable outlook for CWJA, NCBJ, PJAM, DB&G, and BNSJ. Seprod, D&G, CRTS, and Goodyear could also perform well over the short-term. Please contact DB&G's Stockbrokerage department at 1-888-CALL DBG for further information on these and other stocks or visit for detailed analyses.
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