The Goodyear Tire & Rubber Company: Profitability May Not Be Sustained (NASDAQ:GT) – Seeking Alpha | CarTailz

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The Goodyear Tire & Rubber Company (NASDAQ:NASDAQ:GT) is one of the world’s largest operators of commercial truck service and tire retreading centers. The company designs, manufactures and sells tires to over 1,000 retail stores to consumers and commercial customers. Along with it, it provides repair and maintenance related services through its outlets. The company manufactures goods at 57 manufacturing facilities in over 23 counties.

About 85% of total sales come from the tire unit. The company’s presence in the undifferentiated and highly competitive tire industry gives the business a highly commercialized character as vehicle manufacturers use these products as private labels; Therefore, price remains the most important factor for the manufacturer.

In addition, Goodyear faces significant volatility in sales and profitability due to its exposure to the automotive sector; The company’s profitability depends heavily on the average selling price of its tires. During the economic downturn in the automotive industry, the company was unable to generate any significant profits. These facts make Goodyear’s business model very unpredictable and entirely dependent on the cyclicality of the automotive sector. Therefore, investors can predict the company’s profitability for a short period of time, e.g. B. 2 to 3 years, not predict.

Although the company enjoys high brand awareness and is known for performance and product design, the company faces significant price pressure due to intense competition from international players such as Bridgestone and Michelin.

story

In 2011, the company’s revenue hit its all-time high, but then steadily declined through 2020. Since last year, however, sales have grown unusually. In the last ten years, however, it has steadily decreased. During the same period, net earnings have remained highly volatile, with sharp rises and falls year over year, ranging from $365 million to over $2.5 billion; In 2021, the company turned significantly toward profitability after suffering significant losses during the pandemic period.

In addition, management has kept debt at a reasonably moderate level. Last year, the company’s debt increased to $6.6 billion due to the acquisition of Cooper to strengthen its business model, but it’s manageable relative to total assets. The company has been financially stable with over $7 billion in working capital and approximately $8.3 billion in property, plant and equipment.

Also, despite steadily declining sales and volatile profit margins, operating cash flow has remained largely attractive as higher depreciation costs feed back into cash flow.

Additionally, from 2014 through 2018, the company had invested its free cash flows in share buybacks, but due to the higher share price, those buybacks could only generate little value for investors.

Note that the company has very low gross margins that fluctuate significantly from year to year, giving the company a mass nature where the seller does not have significant pricing power to its customers; Therefore, net profits fluctuate drastically.

strength in the business model

The company enjoys a strong presence in the tire industry along with a brand awareness that has evolved over time due to the constant improvement of its product along with the company’s quality services.

Note that the company has a strong presence in the European and Asian markets, which brings significant revenue to the company.

CFO

CFO (makrotrends.net)

The company’s cash flow generation history also appears very attractive, despite significant volatility in net earnings, the company has generated significant cash flow over a very long period of time, and such a strong cash-generating business model provides the company with significant financial strength.

risk

maturity of the debt

maturity of the debt (investor presentation)

Due to the acquisition of Cooper, total debt has increased significantly; There are currently no major debt obligations for the next two years, but significant debt obligations are due in 2025 and 2026. This, along with the standardization of the business, could result in significant value destruction for long-term investors.

During the cyclical downturn, it becomes significantly more difficult to refinance debt obligations. When the company has a significant debt term during its downturn, when its profitability is hit, it becomes so much more difficult and expensive to refinance debt, the condition impacts the stock price, resulting in a significant correction that will take a very long time to recover can . As such, I believe it’s better to avoid commodity stocks with significant debt.

Also, operating expenses have increased significantly in recent quarters, which has impacted the company’s overall profitability. If the condition persists, profitability could be impacted, which could impact the stock price in the quarters to come.

quarterly results

quarterly result

quarterly result (investor presentation)

In the most recent quarter, revenue grew significantly with clearly attractive net income growth. Looking at the overall quarterly results, the company appears to have grown quarter over quarter, but the investor needs to understand that the recent increase in profitability is driven by the cyclical uptick in the automotive industry, and as we have seen, the company has a long history of steadily declining revenue and highly volatile net profits.

According to management, operating costs have increased, primarily due to increased raw material costs along with increased energy, transportation and labor costs, which have impacted net profit margins. However, management is quite optimistic about the growth of the industry and expects total costs could decrease in the future as margins could recover from the current situation.

Goodyear is currently in a cyclical uptrend and current growth may not last long due to intense pricing pressure from competitors and exposure to the automotive sector.

Stock price

Stock price (makrotrends.net)

Goodyear’s stock price remained significantly higher over the period presented and the company’s price-to-earnings ratio remained volatile due to the wide swing in earnings.

Although Goodyear stock has fallen sharply, I see no safety margin in the underlying business model; Therefore, The Goodyear Tire & Rubber Company is a hold.

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