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Goodyear Shares Surge on Labor Pact

AP
Wednesday, 3 Jan 2007 | 11:41 AM ET

Shares of Goodyear Tire & Rubber climbed to a new 52-week high Wednesday, the first day of trading since the end of a three-month strike that had significantly curtailed the company's production.

Goodyear shares easily surpassed their previous peak of $21.35.

Workers at 12 plants in ten states ended their strike Friday by approving a three-year agreement that includes plans to close a Texas tire factory and creates a $1 billion health care fund for retirees. The contract was approved by all 12 locals and the overall membership by a 2-to-1 ratio.

The company said the deal will help shave its costs by $610 million over three years and $300 million per year thereafter.

Workers represented by the United Steelworkers returned to work Tuesday, but company officials said it could be weeks before full production resumes.

Deutsche Bank's Rod Lache upgraded Goodyear to "Buy" from "Hold" and raised his price target to $27 from $19 -- implying growth of 28.6% over its Dec. 29 closing price of $20.99 -- saying the savings created by the new pact exceeded his expectations.

Lache also cited a projected drop in the tiremaker's tax rate and expected cash flow improvements.

"We have noted several long-term concerns about Goodyear's competitiveness, as well as concerns about Goodyear's ability to sustain high margins in emerging markets," Lache wrote in a note to investors.

"While these risks remain, we now believe that Goodyear should be able to achieve substantial earnings and cash flow improvement even with conservative operating margin assumptions for these markets."

The analyst added that Goodyear should also benefit in the near-term from an improving North American supply and demand dynamic.

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