Goodyear Tire & Rubber (NASDAQ:GT) has had a forgettable year in 2020. Shares of the Ohio-based tire maker have been roughly slashed in half year-to-date with the impact of the pandemic economy weighing heavily.
With the stock now trading well below book value, value-minded investors may be wondering if Goodyear is worth buying. Let's take a step back and see what has gone wrong and what will need to happen for the company to get out of its recent skid.
Why is Goodyear Stock Down?
The pandemic has not been kind to Goodyear. Sales volumes have been significantly down in the core tire business as well as its other business segments (rubber-related chemicals and commercial truck service). Automobile manufacturers' assembly lines grinded to a halt at the onset of the pandemic and have since been slow to ramp up production. Demand in Europe and India has been particularly weak.
Demand for tire replacements on existing vehicles has also been weak. Budget-constrained consumers that are driving fewer miles these days anyways have largely put off this expense. Throw in sharply increasing raw material costs and its easy to see how Goodyear's financials have been hammered from multiple directions.
It also hasn't helped the share price that the company chose to suspend its dividend to preserve liquidity. Meanwhile, Goodyear's $2.1 billion stock buyback program has been idle the last couple years and will likely not resume anytime soon.
Last week Goodyear reported third quarter results that beat analyst expectations on the top and bottom lines. Sales were down 9% to $3.5 billion and the net loss was $2 million both of which were better than expected as the market took its best guess absent company guidance in an unusual operating environment.
Management noted that it foresees a faster recovery in the business than it previously anticipated following volumes that improved as Q3 went on. Yet despite the better than expected results and positive outlook, Goodyear stock fell 16.6% in what was a rough day in the market. Was it an overreaction?
What can Drive Growth at Goodyear?
So, with no dividend, no buybacks, and uncertain growth prospects, how can Goodyear win back value investors?
The 100-plus year-old company's tagline for investors states that "the best is yet to come". But while management had a surprisingly upbeat tone in its latest report, what can drive revenue and earnings growth at Goodyear?
Goodyear will probably continue to struggle for as long as the pandemic goes on. Although it has reopened its manufacturing facilities, demand from auto manufacturers and other end markets remains muted.
One bright spot, however, is the Chinese market. China's economy has recovered relatively well this year, and this has included strong demand for tire replacements. Goodyear's China consumer replacement volume jumped 19% year-over-year and reached a record level last quarter.
Aside from the Asia-Pacific region, Goodyear's joint venture with Bridgestone has the potential to produce long-term growth. The TireHub JV created the country's largest tire distribution network. The partnership will offer customers a full range of tires for cars and light trucks with an emphasis on meeting increasing market demand for larger premium tires.
In addition, Goodyear's late 2019 buyout of Raben Tire will improve the company's presence in the fleet market and support growth.
While Goodyear can't control the pandemic developments and related demand, it can make progress on the expense side of the ledger. Capital expenditures are expected to be below $700 million and remain modest for the foreseeable future. A cutback in discretionary spending, lower raw material costs, and reduced depreciation costs can all lead to improved performance. Last, the permanent closure of its Alabama facility is also expected to generate cost savings in 2021.
Is Goodyear Stock a Buy?
From a technical perspective, Goodyear stock has endured a persistent pattern of lower lows and lower highs dating back to early 2018. A reversal in this long-term trend would instill more confidence for traders.
Goodyear is trading just below its 50-day and 200-day moving averages. If the stock can stage a convincing, high volume move that regains one or both of these trendlines, this would be a good time to consider jumping in.
In terms of valuation Goodyear is undoubtedly cheap. It has always traded at a low multiple to its book value but is currently well below its five-year P/B average at 0.4x. The 0.1x price-to-sales multiple is also near a historical low (but similarly reflective of the weak near-term outlook).
Buying Goodyear here is taking a leap of faith that normal sales volumes will resume on the other side of the pandemic. But beyond this, the Asia-Pacific market, the TireHub JV, and a stronger presence in the fleet space all have the potential to drive better than expected results over the long-term.
Goodyear Tires is starting to look like a buy, but investors should tread lightly.
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