Goodyear facing bumpy road as market conditions take toll on tire industry

AKRON—Goodyear lost 42 percent of its market value in 2018, as its stock plummeted from more than $34 a share to about $20 per share between Januaries.

The company has been facing a challenging environment, with high raw material costs, a tough market for price increases, lower demand for its tires in the U.S. and some other markets, and a slowing Chinese economy.

So, what's in store for the Akron icon?

The company and at least some of the analysts following it think Goodyear can wait for conditions to swing around in its favor, something the 120-year-old company has done many times. But others say it could face pressure to change, possibly even from an activist investor if one chooses to take advantage of the company's vulnerable position.

"It's not a vote of confidence when your stock drops from $40 to $20. I'm surprised there's not an activist in there now," said Anthony Deem, an analyst who follows Goodyear at Independence-based Longbow Research.

Deem, often critical of Goodyear, has not been taken totally by surprise by the drop in the company's stock.

"I didn't think the stock would drop as precipitously as it has, but I think it's justified," Deem said.

Others think the market has overreacted and don't blame Goodyear.

"The tire business is one that's incredibly complex," said John Healy, an analyst at Northcoast Research in Cleveland. "There's a chemistry business to it in terms of research and development and creating a quality product. Then there's a very challenging manufacturing side of things, and there's the sales on a global basis. …Then there's also the impact of raw materials and foreign exchange (currency) movements. It makes it just a tough business to manage."

Healy, a value investor, has a buy recommendation on Goodyear's stock.

He and Deem agree, along with the company, on some of the things Goodyear needs to do: Build and maintain capacity for high-value tires, enforce higher pricing, regain some market share at home and abroad, and, perhaps most important, stop surprising the markets with bad news.

That last point has been particularly painful to watch, analysts say, because the wounds of missing earnings guidance are largely self-inflicted in their eyes, and they cost the company dearly in credibility with investors.

"That was one of the big problems with the stock last year. The company didn't have reliable forecasting. I think in something like 12 of the last 14 quarters they've revised their guidance," Deem noted.

He and others say Goodyear may have addressed that issue by bringing back its former chief financial officer, Darren Wells, who they say ran a tighter ship before he left the company in 2013. Wells seems to have taken his lumps early by removing the company's earnings guidance for the year. But investors went from expecting operating profits of $1.8 billion at the start of 2018 to $1.3 billion, and, now, perhaps a bit less. The company is expected to release its 2018 results on Feb. 14.

Goodyear vice president of finance Christina Zamarro said the company is addressing its issues, though some will take time to resolve.

She said the company is having fewer troubles with its pricing, something critically important as Goodyear attempts to sell more large-diameter, high-value tires. On a standard tire with a diameter of 17 inches or less, Goodyear makes about $9 in profit, compared to about $26 on a larger, high-value tire, the company reports.

Goodyear was the first big tire maker to increase prices last year, and when others didn't quickly follow suit, it was at a price disadvantage. But the pressure of higher raw material costs have evened the playing field, Zamarro said.

"We hit a point in the fourth quarter where the majority of tire makers had come out with price increases, so it's moving in the right direction," she said.

The company also has addressed its capacity issues, she said. It once had trouble making as many of the high-value tires as customers wanted, but a new $550 million plant in Mexico will enable it to meet demand.

"In the U.S., at the end of 2016, we were very tight on high-end tires. 2017 saw a little relief, but it came from flat to down markets for replacement (tires). We've added new capacity for North America, and that's ramping up now," Zamarro said.

Deem said he's talked with suppliers of the Mexican plant, who were impressed.

"They've never seen a plant ramp up so successfully in such a short time frame while other competitors are struggling to get capacity," he said.

But it's another nation that might worry Goodyear and its analysts the most—China. The nation of about 1.4 billion people has only about 240 million cars, so it's seen as the ultimate growth market for automakers. But the Chinese economy's growth rate slowed to 6 percent last year, more than enough to clobber its auto industry.

"It's resulted in an OE market down 4 percent in 2018, and that was the first time the Chinese market has been down since 1990," Zamarro said.

Goodyear also can't do much about the value of the U.S. dollar, which when high dings the company's profits when it brings foreign currency home and coverts it to dollars.

As it waits for those situations to improve, Goodyear is taking steps to cut costs and increase sales, Zamarro said.

It hasn't announced any recent job cuts in Northeast Ohio, and no announcements are pending regarding further closures, Zamarro said. Since 2010, it has shuttered four plants, including three in the European Union.

The company formed TireHub L.L.C., a joint venture with Bridgestone Americas Inc. that will wholesale both companies' tires. It also launched Roll, a service by which consumers can order tires from a Goodyear dealer and have them delivered and installed at their home or business.

Whether those moves will be enough or whether external conditions will change soon is still up in the air.

Zamarro, however, doesn't think there's much an activist investor or a purchaser could do differently, though.

The tire company already is so concentrated that another major company could have trouble buying Goodyear anyway due to antitrust laws.

"When you think about someone coming in to purchase our company, the idea is usually that there's something that the management team isn't doing to change the course of business over the short course of time … but I think our leadership team has demonstrated an ability to get savings from our business as well as to drive underlying performance," she said.

More succinctly, Zamarro said, "This is an industry issue, not a Goodyear issue."

Healy thinks the company is set to have a good year, with its balance sheet in good shape, its costs under control and a good strategy to increase sales. Like Deem, he said there are many variables beyond the company's control that could threaten its success, but he's in.

"As we exit 2019, you'll see Goodyear in good shape," Healy predicted.