Goodyear Tire & Rubber Remains A Sell

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About: Goodyear Tire & Rubber Co. (GT)
by: Leo Nelissen
Summary

Goodyear reported another quarter with both sales and earnings coming in well below expectations.

The company's earnings cycle continues to slow and 2019 is expected to be another tough business year.

I am staying far away from the stock for the time being as key markets might witness even more weakness than previously expected.

The largest North American producer of tires is having a tough time. Goodyear Tire & Rubber's (GT) stock price has fallen to levels not seen since 2011. The company continues to miss the economic growth boat as input inflation continues to pressure the company's margins. Add to that the fact that the economy is starting to slow, which is already clearly visible in key growth markets like China. Overall, I have to say that I am staying as far away from this stock as possible as much as I hate to say it because I am a big fan of the company's history and products.

Source: Car Logos

Earnings And Sales Missed Again

Fourth-quarter EPS continued what the third quarter had started. EPS had another big miss. This time, earnings came in at $0.51 versus expectations of $0.60. EPS is also down $0.48 compared to the prior-year quarter. This translates to a decline of 48%. This is the sixth quarter with negative growth since the start of 2017. It is also the fourth consecutive quarter with negative growth. There is no denying that the company's bottom line is in a very tough place right now.

Source: Estimize

Sales aren't much different with revenue growth being negative for the first time since Q2 of 2017. Sales hit $3.88 billion in Q4 which is below expectations of $3.93 billion. It is also 5% below the $4.07 billion the company's top line reached in the prior-year quarter. Back then, sales growth was at 9%.

I think it is fair to say that the bigger picture is everything except positive. Below, you can see that cost cutting has kept net income somewhat stable while sales have been in a downtrend since 2012. Note that the years between 2012 and now included strong growth acceleration in 2013, 2016 and 2017, and growth slowing in 2014 and 2015.

The overview below shows how tough things are. Volume was down 3% in the fourth quarter while the company expected volume growth to be flat. The original equipment environment in both China and India continues to weaken while price/mix strength was not able to offset a weaker mix. Source: Goodyear Q4 2018 Earnings Presentation

Negative volume growth and slower net sales caused gross margins to decline by 190 basis points to 22.4%. Segment operating income was down 29%. Operating margins declined 270 basis points to 7.9%. Note that not one single region did see positive units growth. The Americas saw a 2% volume growth while APAC had to deal with a 10.2% volume decline. EMEA was flat.

Unfortunately for shareholders, it seems that this trend will continue going into 2019. The positives are largely based on strong production capacities and projects like TireHub and better pricing. However, cost savings will be slower while raw material inflation is likely going to be a problem in 2019 as well.

Source: Goodyear Q4 2018 Earnings Presentation

Full-year 2019 expectations include expected consumer replacement volumes growth to be flat to up 2%. This is expected to be the case both in the US and Western Europe. Consumer OE growth is expected to be between -4% and 0% in the US. Commercial replacement is expected to be between 1% and 3% while commercial OE growth is expected to be between -2% and +3%. Expectations for commercial replacement and commercial OE are equal for both the US and Western Europe.

Additionally, I have to mention the earnings cycle again. Yes, it is true that the company has generated positive operating income in every single year since 2003 (start of graph below). However, one should not forget that the cycle peaked in 2015 which is well before the US cycle peaked.

Source: Goodyear Q4 2018 Earnings Presentation

One could say that the US cycle has peaked at the end of 2018 when leading economic indicators like the ISM manufacturing index (graph below) started to turn from peak growth to growth slowing. In other words, it makes a quick recovery in Goodyear's case even less likely.

Source: Article - The Economy Is On Thin Ice

Needless to say, I think we are dealing with a tricky situation here. Goodyear's earnings cycle continues to slow while cost cutting is expected to slow in 2019. So are US leading indicators which means it is going to be even harder to support volume and sales growth.

I am therefore staying very far away from this stock. Maybe in the future, we might be dealing with a very interesting bargain. However, at this point, I think we are only dealing with a company in a very strong cyclical downtrend.

Source: FINVIZ

Going forward, I will obviously continue to monitor the situation. Not only to spot a possible bargain in the future but also because the company might give us more clues about the state of the economy.

Stay tuned!

Thank you for reading my article. Please let me know what you think of my thesis. Your input is highly appreciated!

Disclaimer: This article serves the sole purpose of adding value to the research process. Always take care of your own risk management and asset allocation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.