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Show 13 IMgp Business iiHHll! OQUiIGG Baeli Barring unexpected difficulties dif-ficulties or production tie-ups occasioned by the upcoming union negotiations early this year, the rubber business should record improvement over a year ago during our nation's na-tion's Bicentennial. There are a number of favorable elements which point toward an increase in production levels, revenues, and profits. WHEN THE Arab oil embargo em-bargo first came upon us, investors were immediately concerned over the impact it would have on American driving patterns as well as on the costs of materials and manufacturing. This worry made the price of common stocks in the rubber industry slump to the lowest level in years. What with the slipping auto business in 1974 and well into 1975, plus the influence of the recession, tire shipments to both original equipment and replacement markets declined markedly. This precipitous downturn broke a string of consecutive annual upticks of several year's standing. While the drop-off in tire shipments in recent years has had a negative effect on the industry's operating results, much of this had already been discounted in the prices of rubber common stocks. At last, however, the reversal of the recessionary downtrend and the general pickup in industrial in-dustrial activity as measured by GNP have signaled healthier financial results for tire makers. RECENT quarterly reports show the firming trend in the profitable replacement tire arena. When final reports for the last quarter of 1975 come out, some tire fabricators expect ex-pect to see gains owing to a reduced inventory structure and the need for retailers to restock their shelves in the light of apparently strengthening demand at the consumer level. Not the least of the many elements favoring a return to the growth road by tire firms is the renewed strength in the auto industry. Present auto inventories are the lowest in over a year, and with sales improving as they are, higher production rates should follow. It must be recognized that in many cases the trend of future tire sales is set in Detroit when the car is as- sembled, and the huge numbers of cars sold in 1971, 1972, and 1973 are now prime candidates for new tires. Helping tire sales, too. is the growing number of vehicles on the road versus the annual scrappage rate, plus a rise in vehicle-miles driven over 1974 totals. Though gas is now very costly, it is readily availabe, so car usage and tire consumption are up. MANY NEW cars are outfitted out-fitted with higher-margin radial tires, and the market penetration for this type is expanding. Further gains are expected for 1976. The Research Department of Babson's Reports looks for more domestic auto assemblies as-semblies in calendar 1976 and this should translate not only into more tire sales but also into improved turnover for nontire auto products produced by several rubber companies-such as carpets, wheels, seat belts, hoses, etc. The rubber industry is now nearing the end of its current three year labor contract. Considerable hard-nosed bargaining bar-gaining lies ahead owing to the spectacular jump in inflation that has been seen, with its upward pressure on the cost of living during the period of the existing labor agreement. It is, of course, still too early to know precisely what labor's final demands will be, but at any rate some inventory building can be anticipated before the April expiration. IN WEIGHING the possibility pos-sibility of strikes stemming from the labor contracts and their potential impact on portfolio holdings, shareholders should take a longer-term approach. Do not sell an attractive issue iust because a shutdown might briefly depress the price. |