Today the company announced that it expects fourth-quarter profits of 55-65 cents a share. While that is miles ahead of the 4 cents analysts expect, the numbers aren't really comparable. Goodyear's guidance includes a $155 million insurance settlement and a $22 million lawsuit settlement, $11 million in asset sales, and $26 million in charges. Still, the announcement of big profits is a big plus -- and there was other great news in the announcement. On the product side, although raw materials costs climbed higher than anticipated in the quarter, the rise was more than offset by increased volume, greater sales of new product lines and higher-end tires, and favorable currency gains. Overall, revenue in Q4 is set to come in at $4.8 billion, compared to $3.9 billion a year earlier.

This is a strong validation that the potential market improvements we highlighted last week are in effect. Industry conditions are improving, and simultaneously Goodyear's product line has turned a corner. Central to the upside is the currency story. We saw the stock market come unglued yesterday after the South Korean Central bank said it would diversify its currency holdings away from the U.S. dollar. Similar changes by other foreign central banks would put further pressure on the greenback. The current account deficit, meanwhile, will continue to weigh on the value of the dollar. Goodyear, a truly global company, stands to benefit substantially from the weak dollar -- and even more from further declines from this level. A weak dollar gives Goodyear much needed pricing power.

The other central part of the story is the company's ongoing effort to de-lever its balance sheet to boost its results. Goodyear announced that it ended the year with $5.6 billion in debt. Indeed, Goodyear announced today that its de-leveraging plan is gaining momentum: In April, the company will refinance $3.3 billion of its credit and loans due in the next two years with new five-year credit facilities. This begins what we've characterized as a "virtuous cycle". Balance sheet improvements should produce debt ratings upgrades, which should lead to lower interest expenses, higher earnings, further debt reduction, and subsequent ratings upgrades.

That said, please be clear that Goodyear's path to long-term gains is fraught with risk. It is battling in a highly competitive market, and facing higher raw material costs and mixed relationships with tire dealers and automakers. Heavy debt is an anchor that limits its options for growth, and the company also has a large pension overhang. A turnaround in the dollar, while not expected, is always possible. That would hurt sales.

All these factors make Goodyear a higher-risk investment. As a component e of a well-balanced portfolio, however, we like the stock, even after its bounce today. The turnaround story is a clear one. Goodyear has put the wheels in motion, and the benefits of this turnaround are now materializing on the top and bottom line. In addition, the stock is a clear-cut play on the weakness in the dollar. Finally, Goodyear brings a nice industrial/manufacturing component to the Recommended List. Even after today's gain, it can now be had at a price nearly -15% below the 52-week high it attained just last month. This was a $25 stock just a few years ago.

The risks for Goodyear on its turnaround path are indeed sizeable. However, with the right market conditions and continued smart strategic execution, the rewards could be substantial. You have to decide for yourself if Goodyear suits your investment needs and risk preferences -- or even whether to wait for weakness to add it to your holdings. In our book, the upside is worth the risk at this level in a properly diversified portfolio. We add the stock to the Recommended List with a "Buy" Rating and a Target of $18.00, good for a 30%+ gain from here.

Good Investing!

Peter Topolewksi
Managing Editor, Bull Market Report
Email: Editor@BullMarket.com.