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Goodyear Down 37% YTD: Can Growth Efforts Revive the Stock?

Goodyear Tire GT is going through tough times, thanks to elevated financial gearing and strained margins. It should be noted that the tire company has lost 67% of its value over the past five years. Its revenues and EBIT witnessed a negative CAGR of 2.7% and 11.1%, respectively, in the 2015-2019 time frame. Soft demand in Europe, erratic market environment in China and the LATAM region, challenges in dealership networks, along with soaring raw material costs have hurt the stock. The firm’s debt has increased more than 25% since 2015. The coronavirus outbreak added to the company’s woes. These headwinds are reflected in the stock’s drab run on the bourses of late. On a year-to-date basis, shares of Goodyear have tumbled 37%, wider than the industry’s 20.8% decline.

Let’s Delve Deeper

Goodyear has been experiencing COVID-19-led low demand. Original equipment unit volumes are sliding as global automakers have suspended vehicle production in the wake of the virus eruption. Amid the crisis, the company posted loss for first-half 2020. During the time period, not only the firm’s free cash flow was negative, but also cash flow from operations was negative $820 million.

Goodyear is also expected to experience volume headwinds in Europe, Middle East and Africa segments owing to stricter emission testing compliance on vehicles. Rising conversion costs, weaker third-party chemical sales and lower global vehicle production are likely to dent operating income. 

Surging raw material costs and unfavorable currency translation are also hurting Goodyear’s profit levels. It expects raw material costs to increase in the upcoming quarters, which in turn will dent margins. Goodyear, which is witnessing tightened credit conditions and volatile foreign currency translation, anticipates transactional currency headwinds to persist in the coming periods. The firm is also bearing the brunt of rising SG&A expenses over the last several quarters. Even though the company is implementing cost-cut efforts, such initiatives are not likely to counter weak margins due to low revenues.

The firm’s elevated leverage is also a cause of concern. As of Jun 30, 2020, long-term debt and finance leases amounted to $5.7 billion, up from $4.75 billion on Dec 31, 2019. Following the earnings decline and debt rise, the leverage expanded considerably. Notably, Goodyear’s long-term debt to capital ratio of 0.68 is higher than the industry’s 0.51. As its financial gearing has gone through the roof, the company has limited resources to address product-mix issues.

Moreover, amid COVID-19-led downturn, Goodyear has tapped brakes on its quarterly dividend. Well, this does not come as a surprise, given the soaring debt levels and operating cash flow of the firm that has plunged deep into the negative territory. The company needs to put in efforts to deleverage itself and boost cash flows so that it can materially reinstate its dividends. However, that’s unlikely to happen in the near future.

While the afore-mentioned factors demonstrate that Goodyear is likely to remain in rough waters, strategic buyouts and expansion of products/services may offer some respite.

Green Shoots in Sight?

Goodyear’s TireHub JV with Bridgestone bodes well for long-term prospects. TireHub, which is a U.S. national tire distributor, offers Goodyear greater control and alignment over distribution of tires. TireHub is expected to provide a superior, fully-integrated distribution, warehousing, sales and delivery solution that is expected to lead to enhanced fill rates and turnaround times. Goodyear’s buyout of Raben Tire has also expanded its network and strengthened the company’s ability to serve fleets.

Goodyear’s efforts to roll out innovative products and services boost optimism. The company is working on an intelligent tire prototype that will facilitate fleet operators to enable real-time communication via a mobile application. Goodyear has successfully launched the Roll retail pilot and continues to expand the Mobile Tire Shop network. It has launched the pilot program in collaboration with Redspher, a transport and logistics group operating in Europe. The firm rolled out AndGo and Goodyear Ventures in January 2020. While the new capital venture fund — Goodyear Ventures — intends to advance future mobility solutions over the next decade with a targeted investment of $100 million, AndGo is designed to be a seamless vehicle servicing platform that integrates predictive software with a trusted service network.

Moreover, substantial salary reductions and deferrals, furloughs, as well as capex reduction may offer some relief from the coronavirus-led financial crisis. During the latest earnings call, management stated that U.S. original equipment manufacturers and the China-based replacement market have started to pick some momentum. Nonetheless, demand pressure still exists in the markets of Europe and India.

Zacks Rank & Key Picks

Currently, Goodyear carries a Zacks Rank #3 (Hold). Some better-ranked players in the auto space include Lithia Motors LAD, AutoNation AN and Sonic Automotive SAH, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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