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At the beginning of the year I believed that Goodyear Tire and Rubber (Nasdaq: GT) It was scheduled to arrive in 2024. The company experienced a real accumulation of debt after the acquisition of Cooper Tire & Rubber, which affected the business and investment situation for a very long time While now.
The weak performance has attracted activist investor Elliott Management to push for changes, with a focus on portfolio optimization, margin expansion and debt reduction. While the plans have been made, announced and initiated, the emerging green shoots have yet to emerge in tangible results. Right now, I see no reason at all to change the neutral but cautious stance here, waiting for some real progress.
About Goodyear
Goodyear acquired Cooper Tire in a $2.8 billion deal in 2021, as the addition of North America’s then-fifth-largest tire producer would increase its market share and Pro forma sales were $17.5 billion (based on 2019 numbers, as 2020 numbers were highly skewed by the pandemic).
Goodyear shares actually rose 20% on the back of the deal announcement to $17 per share, as investors liked the rationale and expected $165 million of synergies, all of which looks very optimistic, I must say.
The deal closed in the summer of 2021, with the company’s sales increasing 38% that year to $17.5 billion, while recording earnings power of about $2 per share. After a strong recovery in 2021, the following year was much more sluggish, causing the $20 share in late 2021 to bottom out the following year. Needless to say, this was very disappointing, as this stock was worth $70 in the 90s already!
While the company increased sales in 2022 to $20.8 billion, supported by inflationary pressures, the company reported GAAP earnings of just $202 million, equivalent to $0.71 per share, as net margins came in below 1%. Thin margins and a mounting debt load prompted Elliott Management to dive into the business in the spring of last year.
This was badly needed as 2023 sales were trending downward, but on top of that, the company was starting to record significant losses, as those losses and poor cash flow conversion pushed net debt to $7.7 billion. Even if the company excluded several “one-time” items, adjusted losses would still amount to $0.28 per share for the first nine months of 2023.
Under pressure from Elliott and weak results, the company announced the Goodyear Forward Plan last November, which included the sale of non-core assets (chemicals business), Dunlop brand, and off-road tire business. With about $2.5 billion in sales leaving the door, the idea was to be able to reduce leverage by $2 billion. Other measures included a general cost-savings program and a focus on core business growth, all designed to boost sector margins to 10% by 2025, which seemed very ambitious, all while the company also appointed a new CEO.
With margin expansion seen and leverage expected to decline, implementing this plan should theoretically allow for an earnings power of ~$3 per share, as Elliott believes this could result in a stock >$30 at the time of investigation. The problem is that a lot of implementation risks appeared in this plan, as this was just a piece of paper at the beginning of the year, which made me wary of jumping into the story.
The proof is in eating the pudding
A stock price of $14 in January has fallen to $12, after shares traded in a range of $12 to $14 so far this year.
In February, shares fell from $14 to $12 when 2023 results were released, but on top of that, there were comments on 2024. Full-year sales fell by 3% and changed to $20.1 billion, with the company recording a significant net loss according to the principles GAAP accounting for $689 million. Equals $2.42 per share, where after several adjustments the company reduced earnings of $0.21 per share on an adjusted basis. Net debt amounted to $6.7 billion, equal to the same period of the previous year.
The projected cost savings of $1 billion (at run rate) from the end of 2025 is expected to deliver savings of $300 million in 2024. Comments around the first quarter were not comforting, with tire volumes seeing a 2% decline. While some effects of initial cost savings were seen, as well as the expected benefits from lower inflation, the overall commentary did not appear very optimistic.
In May, the company reported an 8% drop in first-quarter sales to $4.5 billion, with tire unit volume falling to about 40 million, with some headwinds from a fire at one of its European factories. Deflationary pressures pushed gross margins up more than three points to 18% of sales, but the bottom line showed a net loss of $57 million, or $0.20 per share.
After some adjustments, the company reported adjusted earnings of $0.10 per share, but the frequency and size of the adjustments here remind me of Alcoa in the past. In a weaker quarter in terms of cash flow generation, net debt rose to $7.4 billion.
This debt load remains modest compared to the company’s market value, as the value of the 286 million shares here does not exceed $3.4 billion, less than half of the debt.
What now?
The truth is that while the ambitions are good and the company claims to be increasing its cost-savings target to $375 million this year, the reality is that the bottom line remains very mixed. Furthermore, no concrete news about divestment plans has been delivered, making this story largely a wait-and-see story.
While expectations have fallen a bit further, amid the ongoing decline in stock prices, the reality is that although some green shoots are emerging, I am still far from convinced of the investment case. Therefore, I see no reason at all to run my tires here.
