Bear of the Day: Goodyear Tire & Rubber (GT)

The Goodyear Tire & Rubber Company (GT) is one of the world's leading tire companies, with operations around the world and one of the most recognized names in the business.

It operates through three segments-the Americas; Europe, the Middle East, and Africa; and Asia Pacific-developing, manufacturing, marketing, and distributing tires for most applications.

Goodyear also operates roughly 1,100 tire and auto service center outlets where the company offers customers products for sale and provides automotive repair and other services.

Sitting at a #5 (Strong Sell), Goodyear experienced unexpected headwinds this year that negatively impacted its performance.

Disappointing Third Quarter Results

Goodyear faced many challenges in its third quarter, including lower consumer replacement volumes, production cuts by automakers, and an over 30% increase in its raw material input costs.

As a result, adjusted earnings fell almost 40% year-over-year to 71 cents per share, though the bottom line surpassed the Zacks Consensus of 67 cents.

Revenues of $3.92 billion only marginally beat our consensus estimate as well. Breaking it down by segment, revenues in the Americas slipped 1%, but EMEA and Asia Pacific revenues grew 6% and 5%, respectively.

Goodyear said that tire unit volumes were 39.8 million, down 5% from 2016. Replacement tire shipments fell 4%, while original equipment unit volume declined 9% year-over-year due to lower volume sales.

And, segment operating income dropped to $357 million in the reported quarter from $556 million a year ago.

Hurricane Impact

The decline in Goodyear's Americas segment was due to the major hurricanes that devastated large swaths of the country earlier this year.

It operates three chemical plants in Texas, and has tire distribution and retail operations in the affected areas that were either damaged or shut down.

In particular, sales at company-owned locations were negatively impacted by about $23 million, and Goodyear incurred roughly $12 million in hurricane-related costs during the quarter.

Overall, Goodyear estimated that the negative impact caused by the hurricanes on the U.S. consumer replacement industry was approximately 1%.

Earnings Estimates Lowered

Since the report, it seems that analysts are bearish on GT's future outlook.

For the current quarter, four analysts cut their estimates in the last 60 days, lowering the Zacks Consensus to 73 cents from 92 cents per share; this represents a year-over-year decline of 22.74%.

This sentiment even spills over into next year, where six analysts revised their estimates lower over the last 60 days. The Zacks Consensus now sits at $3.74 for fiscal 2018, down from $4.24.

Can Shares Rebound?

Shares of Goodyear have only returned 1.8% year-to-date compared to the S&P 500's bullish gain of 18.8% in the same time frame.

The Goodyear Tire & Rubber Company Price and Consensus

The Goodyear Tire & Rubber Company Price and Consensus | The Goodyear Tire & Rubber Company Quote

Goodyear currently trades at a forward P/E of 11.

Major storms like Hurricane Harvey had a huge effect on companies in every industry, and Goodyear is just another example of one.

Assuming we experience far less devastating hurricanes next year, and assuming Goodyear now has the knowledge to handle a situation like that, its Americas segment should be back on a growth track as well, joining its solid EMEA and Asia Pacific divisions.

For investors looking for an auto space stock with more near-term potential, they should consider SORL Auto Parts (SORL), a Zacks Rank #1 (Strong Buy) stock that anticipates 58% earnings growth for the year.

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SORL Auto Parts, Inc. (SORL): Free Stock Analysis Report

The Goodyear Tire & Rubber Company (GT): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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