Goodyear,
a fundamental analysis!
March 01, 2019
SHARE PRICE: $19.78
MARKET CAP: $4.59B
1. INTRODUCTION
I’ve decided to analyse Goodyear because after looking at Netflix and Amazon I needed a break from the tech industry. I have no clue if Goodyear is a good company or not so let’s start from the beginning and take it slow. Their website is my first stop.
2. BUSINESS OVERVIEW
2.1. BUSINESS DESCRIPTION
Charles Goodyear’s life’s story is filled with many ordeals and singular episodes. He was an entrepreneur going in and out of misery several times over the years, six of his twelve children died on their infancy, he went to jail at least a couple of times because of unpaid debts and after a long process of trial and error he managed to invent the process we now call “vulcanization”. At the time of his death in 1860, he had a $200.000 debt.
But the company we know today has got nothing to do with Charles. The Goodyear Tire & Rubber Company was founded in 1898 by Frank Seiberling and its name was just a way to honor the inventor of the vulcanization process. The company started with 12 employees making bicycle tires, carriage tires, horseshoe pads and poker chips.
Goodyear went on to become the world’s fourth largest manufacturing tire company with revenue of $15,4B in 2018, 47 manufacturing facilities over 21 countries and 64.000 employees. They now make and sell tires for cars, buses, planes, motorcycles, and just about anything that goes on rubber tires (excluding agricultural tires).
Some of their brands are Goodyear, Dunlop, Kelly, Debica or Sava.
Goodyear still holds the record for the tire manufacturer with the most wins on the Formula 1.
2.2. LARGEST SHAREHOLDERS
Being such a long lived company, I’m not expecting to find the founders among the largest shareholders….
….the big funds are now the major owners.
2.3. MANAGEMENT TEAM
I googled the CEO Richard Kramer and found little information about him. He’s an accountant.
It’s funny to see a Firestone among the managers, while Firestone (the company) was sold to Bridgestone in 1988. I did a quick search on Google and found no relationship between him and the iconic brand.
3. HISTORICAL CONTEXT
3.1. LONG TERM CHART
Goodyear’s IPO was back 1927 but I don’t have data going back that far in time.
Throughout the years the stock price has had huge ups and downs and is now at $19,78, more less the same as in 1986. Let’s see if we can figure out the reason for these wild variations.
3.2. MARKET CAP AND SHARES OUTSTANDING
The exact same story can be seen in the market cap trajectory. Mr. Market is pricing the company at $5 billion right now, almost half of what he was willing pay for it 4 years ago.
I’m also curious to understand the enormous plunge between 97 and 2003.
There was a big increase in the number of shares outstanding in 2007 coinciding with a major spike in the market cap. I find this interesting. I’m going to take a look at the company’s reports…
OK. So, I went to the 2007 and 2008 annual reports and found out that this was in part due to a capital raise and in part due to an exchange of convertible senior notes by shares.
Not knowing it, the management timed this capital raise to perfection just before the financial crisis. I would love to see buying back stocks during the financial crisis, but unfortunately, that wasn’t the case.
3.3. SALES - OPERATING INCOME - OPERATING MARGIN
Now that we’ve figured out the “why” for such variations in the number of shares outstanding, let’s move on to the wild price swings.
From 97 until 2002, the operating margin dropped from 8,5% to 1,7%, and that’s why the market cap sunk the way it did. But here was another major reason for it:
“The editors of the Wall Street Journal removed Goodyear, and three other fine companies, from the “Dow Jones Industrials” list. We were replaced with high-tech and telecommunications companies. Mutual funds that owned millions of Goodyear shares were forced to sell our stock simply because we were no longer on the Dow 30 and related lists.“
Looking at the recent years, sales have declined from $23B in 2011 to $15,4B in 2018.
On the other hand, they’ve been able to increase the operating margin and that’s why the stock price rose while sales were going down.
Let’s see how Goodyear’s operating margin stands against its peers:
Clearly Goodyear is the worst performer among the world’s leading tire manufacturers.
3.7. TIRE UNITS SOLD - AVERAGE PRICE PER TIRE
I was puzzled by the lower revenues between 2011 and 2016 (and the higher margin). I thought to myself “this must be because they sold less tires”, so I went digging and this is what I’ve found…
Although there was a decline in the number of units sold in 2012, this number actually increased from 2012 until 2016. I did some math and I found out that the company gradually lowered their average-price-per-tire.
This tells me that this is a highly competitive market driven by price. The cheaper manufacturer will have significant advantages related to the others. There is no pricing power and that is why the operating margin is so important.
3.4. SALES BY GEOGRAPHY
As expected, the USA is their largest and more mature market and Asia Pacific their smallest market.
3.7. NET INCOME, NET MARGIN
Since the IPO, the net Income has been highly erratic and throughout the first decade of this millenium the company reported profits on just three years out of ten.
In 2018, the net income was $693M representing a 4,5% net margin.
3.8. CASH FLOW
Let’s see if the cash flows are telling the same story.
Unfortunately, what they are telling us is even worse. From 2010 until 2015 the company lost money, and the FCF has been declining since 2015. It could almost risk saying that the company won’t generate cash in 2019 (at least without extraordinary effects).
3.8. RESEARCH AND DEVELOPMENT
I thought the decrease in sales could be related to a lower investment in R&D so I looked at the numbers prior to 2011 but I couldn’t find anything. The R&D expenditures as a percentage of revenue have been quite in line with the company’s history and with other manufacturers.
3.9. SEASONALITY
There is no meaningful seasonality to Goodyear’s sales.
3.10. DIVIDENDS
The company stopped paying dividends between 2003 and 2013, and the dividend yield is at 3,24% right now.
3.11. PROFITABILITY RATIOS
The ROE was 13,7% in 2018 which is quite good while the ROA was 4,1% which is too low, even for an asset heavy company like this.
3.12. FINANCIAL RATIOS
The current ratio has been slowly deteriorating along the years, but at 1,2 it’s at an acceptable level for its industry.
The debt-to-equity ratio has been declining over time and is now at 1,1. Although this isn’t a great level, the trend is a good one.
3.13. PRICE RATIOS
With sales declining and no prospects of a turnaround, Mr. Market isn’t too interested in buying this stock. He’s paying a 2019 PE of just 9.
4. GAINING PERSPECTIVE
4.1. INDUSTRY AND STRATEGY
This is a highly competitive and price driven market and that’s why margins are so thin. Any small economic downturn will make the company report losses instead of profits.
If we compare the revenue figures to the rubber prices along the years, we can see that they are highly correlated.
While if we compare the operating margin to the stock price, we can clearly see the correlation.
The company is making efforts to keep a lean operation, but without the control of the raw materials or access to a low cost source, it will always be sailing to where the wind blows.
And although the number of miles driven is obviously rising…
… Goodyear hasn’t been able to gain market share in recent years.
I don’t have the numbers going forward from 2014 but I’ll bet they aren’t materially different from what is shown below.
The low cost Asian Manufacturers are flooding the tire market with cheap tires and this trend doesn’t seem to be slowing anytime soon.
4.2. RISKS AND COMPETITION
As any other manufacturing company with no pricing power, the raw materials costs are crucial and unfortunately the company has no way of controlling that.
Tariffs are also a risk on the short term.
And of course, competition.
4.3. TYPE OF PLAY
Goodyear is both a cyclical play and a turnaround play.
5. OVERVIEW AND CONCLUSION
5.1. OVERVIEW
From what I’ve seen, Goodyear is the worst of the top 4 or 5 leading tire manufacturers in the world. It has a history of erratic profits, really low returns on capital and above all, it hasn’t been able to counter the asian competition like the others have. While Goodyear’s revenue is influenced by the rubber price, oil price and market share, its stock is influenced by its margins and these are usually the lowest when the economy is suffering. To me, this isn’t a stock for the long term. This is a buy low/sell high stock.
I will be waiting for a year of really low margins or even net losses because that’s when Mr. Market will be giving this stock away for next to nothing.
5.2. CONCLUSION
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