Goodyear Had A Bad Quarter

Jul.31.14 | About: Goodyear Tire (GT)


It was a bad quarter in the sense that revenues were down in a big way.

Earnings were up however on a GAAP and non-GAAP basis thanks in large part to cost of goods sold being reduced.

I believe the company should accelerate its buyback program because the stock is really inexpensive based on 2015 earnings estimates.

The last time I wrote about Goodyear Tire & Rubber Co. (NYSE:GT) I stated:

"I like the stock, but will wait until earnings are reported to decide on purchasing another batch." Unfortunately I didn't heed my own advice and bought a tiny batch right before earnings, and since that article was published the stock is down 7.96% (but 7.76% of that drop came in one day on the back of the earnings report that this article is based on) while the S&P 500 (NYSEARCA:SPY) is down 0.16% in the same timeframe. Goodyear develops, manufactures, and markets tires. I know, I know, there's nothing exciting about the business.

The company reported earnings before the market opened on July 30, 2014, and on the surface the results were mixed with the company reporting earnings of $0.80 per share (beating estimates by $0.01) on revenue of $4.7 billion (missing estimates by $40 million). The stock dropped 7.76% the day it reported earnings and what I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Segment Revenues (millions)




North America




Europe, Middle East, and Africa




Latin America




Asia Pacific








Click to enlarge

There isn't much to report here other than overall revenue dropped by 5% from last year. The issue with the North America segment was that third party chemical sales dropped along with lower price/product mix, and original equipment unit volume was down 4%. In Latin America there was a 2% drop in tire unit volume, and bad foreign exchange which caused the drop here. There continued to be a difficult operating environment in Venezuela, inflationary cost increases, and plant expansion costs in Brazil. In Asia Pacific the drop was due to unfavorable price/product mix and foreign exchange.

Income Statement

Income Statement (millions)








Cost of Goods Sold




Selling, Administrative, and General Expense








Interest Expense




Other (Income) Expense




Income before income taxes




United States and Foreign Taxes




Net Income




Less Minority Shareholders' Net Income




Goodyear Net Income




Less: Preferred Stock Dividends




Goodyear Net Income Available to Common Shareholders




Diluted Shares Outstanding




Non-GAAP Rationalization, Asset Write-Offs, and Accelerated Depreciation Charges




Non-GAAP Discrete Tax Charges




Non-GAAP Charges Relating to Labor Claims with Respect to a Previously Closed Facility in Europe




Non-GAAP Net Gains on Asset Sales




Non-GAAP Settlement of Indirect Tax Claims




Diluted Earnings Per Share




Click to enlarge

So after we see a drop in revenue I would expect to see that there was a drop in earnings, but when I look at the bottom line I actually see an increase. Let us dig through the income statement to see how that came to be. The first things I notice are the 8% drop in cost of goods sold, 85% increase in rationalizations cost, and a 157% drop in other expenses which contributed to a 14% increase in income before taxes. After a 5% decrease in taxes the company realized a 20% increase to income after taxes. After subtracting the 280% increase in minority shareholders' net income the company is now at a 13% increase from last year on net income. The company didn't pay any preferred stock dividends this quarter so net income attributable to shareholders happened to increase 18%. After taking into account some non-GAAP accounting items the company realized a 9% increase in diluted earnings per share.


The company saw earnings increase by 9% thanks in part to the non-GAAP accounting while the share price was up 0.99% between earnings calls. Earnings would actually have been higher if non-GAAP items were excluded. The results of this earnings report were not okay to me (earning a D grade from me), and other investors seem to think the same as the stock dropped 7.76% after reporting while the S&P500 increased in value by 0.01%. The financial engineering plan didn't really work because not enough shares were reduced from the prior year to even register 1% as the company bought back 1.15 million shares at an average price of 26.56. In my opinion I believe the company should be buying back more shares right now as I believe the stock to be inexpensively valued on 2015 earnings estimates. The company reaffirmed its 2014-2016 financial targets of segment operating income growth between 10% and 15% per year, annual positive free cash flow from operations, adjusted debt to EBITDAP ratio of 2 to 2.1, and 2% to 3% increase in unit volumes for 2014 when compared to 2013. With the reaffirmed guidance I'm going to continue to buy the stock now at these depreciated prices.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: The author is long GT, SPY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.