The future of Goodyear looks bright


The Goodyear Tire & Rubber Co. (NASDAQ: GT) is one of the largest tire manufacturing companies in the world, selling the brands Goodyear, Kelly, Dunlop, Fulda, Debica, Sava and various other internal brands such as Lee, Kingstone, Douglas, Mohave and Republic. The company also distributes products under private brands, including Roadhandler, Star and Monarch.

Goodyear employs 72,000 people worldwide and manufactures products in 55 factories in 23 countries. Although the company generates sales globally, North America is its largest market. In addition to its core tire manufacturing business, the company also provides auto repairs and other services in certain markets.

Acquisitions strengthen the company’s leadership position

In April 2019, Goodyear signed a 50-50 joint venture with Bridgestone Americas Inc. to form TireHub LLC, which then became the largest tire distribution network in the United States, offering tires for light trucks and passenger cars for meet the growing demand for larger rim diameter premium tires. This partnership bodes well for the company’s long-term growth prospects as it offers better control of tire distribution. In December 2019, Goodyear acquired Raben Tire, expanding its network and strengthening its ability to meet growing demand from both retail and commercial customers. In June, it also acquired Cooper Tire, which further strengthened its leadership position in the global tire industry.

Goodyear constantly strives to develop advanced products through innovation and has succeeded in securing a leadership position in the growing electric vehicle industry by manufacturing fuel efficient and environmentally friendly tires. A classic example is the Goodyear SightLine product suite that enables seamless, safe and reliable mobility for all vehicles, from vans and construction vehicles to last mile delivery trucks. Goodyear DrivePoint is another productivity tool in its Total Mobility offering, which acts as a tire monitoring solution for commercial vehicles. The company is also working on a smart tire prototype that will help fleet operators communicate in real time via a mobile app.

Last August, Goodyear Ventures, the company’s venture capital arm, partnered with electric vehicle charging company AmpUp to increase its visibility in the burgeoning electric vehicle industry. This could prove to be a catalyst for growth in the future, as many automakers plan to spend billions of dollars over the next few years to adopt electric vehicles.

AndGo by Goodyear is another innovative vehicle maintenance platform that integrates predictive software with a trusted service network. Another addition to the company’s growing investment portfolio has been Goodyear’s venture into TuSimple, a global stand-alone trucking technology company through which Goodyear will conduct wear studies to better predict maintenance, understand tire longevity and reduce the carbon impact of fleets.

The company is also implementing restructuring programs in the United States and Germany, forecasting savings of approximately $ 200 million. The closure of the Gadsden plant was part of this strategy to strengthen the competitiveness of its industrial footprint.

Profits are moving in the right direction

For the third quarter, Goodyear reported adjusted earnings per share of 72 cents, which is a significant improvement over comparable earnings of just 10 cents in the third quarter of 2020. Sales volumes increased in all segments, the acquisition of Cooper Tire helping the company to grow. its reach in key markets. The company reported revenue of $ 4.93 billion, an increase of 43% year-over-year, thanks to higher volumes, favorable prices, increased sales of other tire activities and synergies from the Cooper Tire buyout.

Tire volume amounted to 48.2 million units, up 32% from the previous year quarter. Shipments of replacement tires increased 44%, benefiting from the Cooper Tire buyout. Meanwhile, the volume of original equipment units fell 7% year-on-year, affected by lower vehicle production due to shortages of components and semiconductor materials.

Looking at segment results for the quarter, the Americas segment generated revenue of $ 2.9 billion, up 62% from the corresponding quarter last year. Revenue for the Europe, Middle East and Africa segment was $ 1.39 billion, growing over 20% year-on-year. The recovery in both regions was driven by the improvement in the price mix and high volumes.

Perspectives

The company expects fourth quarter volume to be lower than levels seen in fourth quarter 2019 (excluding volume profit added by the Cooper Tire acquisition) due to component and material shortages that limited production global automobile. Supply chain disruptions have hampered the ability to ship products to places where there are no manufacturing plants, which is not a promising sign.

For the full year 2021, the cost of raw materials is expected to increase to a range of $ 450 million to $ 475 million, even with the benefits of the raw material cost reduction measures. The prices of natural and synthetic rubber and the prices of other raw materials are volatile, so estimates could change significantly depending on fluctuations in the cost of these raw materials and exchange rates. In any case, it is reasonable to expect that the price and product line benefits will continue to outweigh the negative impact of high raw material costs in the fourth quarter, helping the company to generate solid profits. .

Inflationary pressures from wage increases, transportation costs and energy costs will also affect corporate profits in the fourth quarter, but most of these challenges are likely to be temporary hurdles.

According to Expert Market Research, the global tire market is well positioned for future growth and is expected to grow at a compound annual growth rate of 4% through 2027, similar to the growth rates seen over the past five years. The global tire market is driven by the expansion of vehicle production and sales in emerging economies, leading to an increase in the number of vehicles in circulation. Light-duty vehicle tires will be in high demand as the growing middle class in emerging countries like India will seek vehicle ownership for the first time in their lives, while high-income families in these regions look to switch to more advanced vehicles.

To take with

Goodyear faces short-term challenges, but its long-term outlook remains bright. The company is valued low in the market at a forward earnings multiple of 10.67. The company is likely to generously reward long-term shareholders with carefully planned acquisitions and cost-cutting initiatives.

This article first appeared on GuruFocus.


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