Goodyear stock plunge may have been a market overreaction, investor says

AKRON, Ohio—Was the precipitous drop in value of Goodyear stock on Feb. 11 a harbinger of a difficult year ahead for the tire maker?

Or was the 27.6-percent nosedive in a share of Goodyear stock—its largest one-day drop since Black Friday, Oct. 19, 1987—just a market overreaction, something largely technical in nature, that will right itself in the months to come?

At least one longtime investment adviser, Shelley Goldberg, said she strongly believes it was the latter.

"The move that occurred that Friday ... I think is technical in nature and macro in nature rather than any idiosyncratic move that was company specific," said Goldberg, founder and principal of New York-based Invest-with-Purpose, a consultancy and investment advisory practice that focuses on environmental sustainability and global resources.

"There are technical reasons why and macro reasons why that stock fell," she told Tire Business in an exclusive interview, "but I wouldn't say it was purely a Goodyear issue. It was hit by both of those effects that caused it to drop."

Goodyear’s stock opened the day on Feb. 11—the same day it released its fiscal 2021 results and 2022 expectations—at $22.61 per share, up from $21.74 at the previous day’s close. The stock jumped to a high of $22.66, but by the time the day ended, it fell to $15.78 per share, losing more than a quarter of its value.

The drop came in the wake of a morning investors’ call in which Goodyear announced that it had returned to the black in fiscal 2021 on 41.9 percent higher sales, buoyed by its mid-2021 acquisition of Cooper Tire & Rubber Co. 

The stock rallied some in the two days that followed, closing at $16.70 on Feb. 15, but Feb. 23, hours before Russia invaded Ukraine, the stock closed at $14.90, its lowest at close since it was $13.90 per share on Feb. 19, 2021.

The Akron-based tire maker reported operating income of $1.3 billion, with sales of $17.5 billion. Most strikingly, net income was $764 million, reversing a net loss of $1.25 billion a year ago.

The bottom fell out hours later after the investor conference call, as Goodyear CEO Rich Kramer and Darren Wells, executive vice president and chief financial officer, discussed some of the headwinds facing the tire maker in the months ahead. 

The executives said that the company was “targeting 2022 free cash flow around break-even,” compared with a 2021 cash flow of $81 million, citing labor shortages, shipping difficulties, continuing semiconductor shortages and increasing raw-materials prices as some of the reasons for inflated pricing going forward.

Wells noted that all tire companies are facing the same pricing challenges. Goodyear charts nine competitors, he said, and seven of them announced price increases in the first quarter, and one of the other two that didn’t, he said, raised prices at year-end 2021.

“So we are seeing very consistent pricing across all the significant industry players,” he said.

“Looking ahead, we expect cost pressures to persist over the next several quarters,” Kramer said. “As you would expect, we remain focused on executing strategies to capture value and drive efficiencies while prudently managing our costs.”

While Goldberg said that context of the call did affect the stock price, she also pointed out that macro factors—large macro moves in the environment that affect the market as whole rather than specific to a company—“affect everyone negatively.” These macro factors include the threat of increased interest rates, higher commodity prices and the threat of war. 

Kramer acknowledged those factors in his remarks, saying Goodyear “is performing at a high level despite a challenging macroeconomic environment. 

“We’re recovering share while improving margins. The Cooper integration is off to a strong start, and we’re driving the innovation necessary to ensure we continue leading our industry through the mobility revolution and beyond.”

In addition to those macro reasons, Goldberg said she believes that a technical aspect also contributed to the stock decline.

Systematic traders, she said, are consumed with charts and various movements on those charts.

“There’s a million different ways to read a chart,” she said.

Investors, she said, read a “double top” regarding the Goodyear stock. According to Investopedia.com, a “double top” is defined as “an extremely bearish technical reversal pattern that forms after an asset reaches a high price two consecutive times with a moderate decline between the two highs. It is confirmed once the asset’s price falls below a support level equal to the low between the two prior highs.”

When those chartist investors read a “double top” pattern, Goldberg said “it is a signal to sell. Therefore chartists sell at that point.” 

During the call with investors, Wells reported that costs for raw materials increased more than $300 million in the fourth quarter. 
“And we saw a step-up in other inflation as well, with over $80 million in calculated general inflation compared with our recent historical average of closer to $35 million a quarter,” he said.

Wells also said COVID-19-related absences continue to hamper the company in factories, requiring the company to hire many new workers, particularly in the U.S., “to address higher retirements and overall attrition.”

He said that “not only results in higher costs for workers who are training others or being trained rather than building tires, but also reduces the normal pace of cost savings programs in our factories and creates a situation with a metric we normally think of as cost savings is negative, reflecting this impact on productivity.

Despite those issues, Goldberg, among others, maintains the stock is “a buy” going forward. She pointed to several reasons.

The first, she said, involves Goodyear’s earnings and estimates. The company has beaten estimates for six consecutive quarters, including by 43 cents in the third quarter and 24 cents in the fourth quarter. 

Secondly, the estimate this year for Goodyear’s price-to-earnings ratio (P/E)—a key for investors—is 5.9 percent versus the auto components industry average of 29.3 percent. Meanwhile, Goodyear’s five-year P/E average is 13.8 percent versus the industry average of 28.3 percent.

And lastly, she said Goodyear’s stock is considered to be 88 percent undervalued and received a financial health ranking of 76 percent as of Feb. 12, according to S&P Global Market Intelligence. In addition, its equity summary score is ranked 8.1 (out of 10) by Starmine from Refinitiv.

In the wake of the earnings slide, JPMorgan hiked its rating on Goodyear to overweight (meaning it deserves a higher weighting than the benchmark’s current weighting for that stock), from neutral. JPMorgan said it sees attractive valuation with much of the supply chain and inflation headwinds factored in at the current trading level. 

In one published report, JPMorgan analyst Ryan Brinkman agreed with Goldberg’s assessment.

“Overall, the sell-off strikes us as an overreaction given what (we) foresee as much more modest needed reductions to consensus (segment operating income and free cash flow), and because pricing has been quite strong so far this cycle, with Goodyear posting its sixth consecutive positive quarterly price/mix-to-raw materials spread in Q4, suggesting the possibility of better than currently envisaged ability to price for non-commodity costs.”

The biggest risk of buying Goodyear stock, Goldberg said, is the company’s debt. She said the longterm debt-to-equity ratio is 175.9 percent compared with an industrywide ratio of 28.8 percent. She said the tire maker’s total debt-to-asset is 41.8 percent compared with 24.1 percent for the industry.

“Debt is the biggest detractor to owning the stock,” Goldberg said.

Still, she said, Goodyear remains attractive for investors, depending on their risk tolerance.

“For those looking to buy dips, this might be a good opportunity to leg into a position,” she said. “There are some headwinds, but if you want to leg into a position, you can start here, and as the market comes off, buy more. That is my strategy.”