By TODD ZAUN
Staff Reporter of THE WALL STREET JOURNAL
TOKYO -- Bridgestone/Firestone Inc.'s recall of 6.5 million tires in the
U.S. has delivered a devastating blow to the company's Japanese
parent, Bridgestone Corp., cutting its stock price in half and knocking
$9 billion off the company's market value.
Given the carnage, could the sharp fall now present investors with an
opportunity to buy the stock on the cheap? Not likely, say analysts.
Bridgestone's stock fell 5% to 1,140 yen ($10.57) last week amid signs
the recall could spread to other Firestone tires, and the shares fell
another seven yen Monday. The stock is now down 50% since
Bridgestone's U.S. unit announced the mass recall of tires allegedly
linked to 101 deaths in the U.S. and more than 50 in other countries,
mostly involving Ford Motor Co.'s Explorer sport utility vehicles. As of
Friday, Ford's shares were down 21% since the recall was announced
Aug. 9.
There is some reason to believe the worst could be over. After all, little
of the bad publicity surrounding the U.S. recall has spilled over to
Japan, where Bridgestone still earns the biggest share of its revenue.
And, though the Firestone brand has been badly tarnished in the U.S.,
the Firestone unit showed two decades ago that, with time, it's possible
to recover from such a recall.
Spate of Lawsuits
But if you're shopping for a bargain, analysts say, Bridgestone is the
wrong place to look. Despite the plunge, they say, Bridgestone's stock
is pricey.
The company still faces significant risks, not least a spate of lawsuits
by
U.S. accident victims that could drag on for years and generate a steady
stream of bad publicity.
"We haven't heard the end of this yet," says Howard Smith, a senior
auto analyst at ING Baring Securities. "We will get a constant flow of
news on lawsuits that will be a dark cloud hanging over the stock."
Bridgestone President Yoichiro Kaizaki has conceded the company will
likely lose some of its business with Ford. Car makers such as Toyota
Motor Corp. and Honda Motor Co. have said they have no plans to stop
using Firestone tires because of the recall, but analysts say car makers
won't hesitate to switch to other brands if consumers show a clear
aversion to Firestone tires.
Firestone may be able to regain any lost market share by slashing
prices, but that would cut into revenue and threaten earnings for the
industry as a whole. There is also the risk that the recall could spread
to
other Firestone tires.
The initial recall covers 15-inch Wilderness AT tires produced at
Firestone's Decatur, Ill., plant, and all 15-inch ATX and ATX II tires.
But
a group of plaintiffs' attorneys is asking a U.S. District Court judge
to
expand the recall to include all Wilderness, ATX and ATX II tires,
regardless of size or origin. A hearing on the move was scheduled to
take place Monday before U.S. District Court Judge David Herndon in
East St. Louis, Ill.
Unrelated Problems
Last week, Firestone tested a separate tire model made for two Toyota
vehicles after small cracks were found on sidewalls, but both companies
said the problems appear to be only cosmetic.
Even if the recall doesn't spread and lawsuits don't prove costly,
analysts say there is little reason to buy the stock. "There are all sorts
of issues hanging over Bridgestone that go well beyond the immediate
crisis," says ING Baring's Mr. Smith. Among the issues are rising oil
prices -- a problem for Bridgestone because many of its raw materials
are oil-based -- and the fall of the euro against the yen, which lowers
the value, in terms of yen, of the company's sales in Europe.
"It's generally not a good time to be a tire manufacturer," says Mr.
Smith, who cut his "buy" rating on Bridgestone to a "hold" last month.
Many analysts were slow to cut their ratings on Bridgestone because
few thought the negative publicity surrounding the recall would continue
as long as it has. The news of the recall also came shortly after the
company reported good earnings for the first half of the year.
Bridgestone later restated its first-half earnings to account for a special
charge of $350 million to pay the cost of replacing the tires.
Bridgestone said its net profit fell 49% in the six months ended June 30
to 18.9 billion yen.
But the charge includes only the direct cost of replacing the recalled
tires. And Bridgestone now faces the likelihood it will incur a series
of
additional extraordinary losses, says Christopher Redl, an auto analyst
at UBS Warburg Japan Ltd.
In the short term, Bridgestone will likely see inventories grow as the
negative publicity surrounding the recall cuts into sales. In the longer
term, the company may incur large costs to close plants (something
Bridgestone has said is possible) and to settle lawsuits, says Mr. Redl,
who cut his "buy" recommendation on the stock to "reduce."
"Even if the stock pops up in the medium term there is going to be
heavy selling pressure," Mr. Redl says.
Write to Todd Zaun at todd.zaun@wsj.com