The Goodyear Tire & Rubber Co. (NASDAQ:GT) is one of the largest tire manufacturing companies in the world, selling the Goodyear, Kelly, Dunlop, Fulda, Debica, Sava and various other in-house brands such as Lee, Kingstone, Douglas, Mohave and Republic. The company distributes products under private-label brands as well, including Roadhandler, Star and Monarch.
Goodyear employs 72,000 people around the world and manufactures products in 55 facilities across 23 countries. Although the company generates sales globally, North America is its largest market. Other than its core business of tire manufacturing, the company also provides automotive repairs and other services in certain markets.
Acquisitions are strengthening the companys 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 U.S., offering light-truck and passenger vehicle tires to fulfill the rising demand for larger rim diameter premium tires. This partnership bodes well for the companys long-term growth prospects as it offers greater control over the distribution of tires. In December 2019, Goodyear acquired Raben Tire, expanding its network and strengthening its ability to serve the increasing demand coming from both retail and commercial customers. In June, it also acquired Cooper Tire, which has further strengthened its leadership position in the global tire industry.
Goodyear constantly strives to develop state-of-the-art products through innovation and has managed to secure a leading position in the growing EV industry by manufacturing tires that are energy efficient and eco-friendly. A classic example is the Goodyear SightLine product suite that enables seamless, safe and reliable mobility for all vehicles, from cargo 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 an intelligent tire prototype that will help fleet operators with real-time communication via a mobile application.
Last August, Goodyear Ventures, the venture capital arm of the company, partnered with electric vehicle charging company AmpUp in a bid to gain more exposure to the booming EV industry. This could prove to be a catalyst for growth in the future as many automakers are planning to spend billions of dollars in the next few years to embrace EVs.
AndGo by Goodyear is another innovative vehicle servicing platform that integrates predictive software with a trusted service network. Another addition to the companys growing investment portfolio was Goodyear’s venture into TuSimple, a global autonomous 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 U.S and Germany, expecting savings of approximately $200 million. Closure of the Gadsden facility was part of this strategy to boost the competitiveness of its manufacturing footprint.
Earnings trending in the right direction
For the third quarter, Goodyear reported adjusted earnings per share of 72 cents, which was a notable improvement from comparable earnings of just 10 cents in the third quarter of 2020. Sales volumes increased across all segments, with the Cooper Tire acquisition helping the company expand its reach in key markets. The company registered revenue of $4.93 billion, a year-over-year increase of 43%, aided by higher volumes, favorable pricing, increased sales from other tire-related businesses and synergies from the Cooper Tire buyout.
Tire volume came to 48.2 million units, up 32% from the year-ago quarter. Replacement tire shipments increased 44%, benefiting from the buyout of Cooper Tire. Meanwhile, original equipment unit volume fell 7% year over year, affected by lower vehicle production due to shortages of semiconductor components and materials.
Looking at the segmental results for the quarter, the Americas segment generated revenue of $2.9 billion, an increase of 62% in comparison to the corresponding quarter last year. Revenue in Europe, Middle East and Africa segment came to $1.39 billion, growing by more than 20% year over year. The upswing in both regions was driven by improvements in price mix and high volumes.
The outlook
The company expects the volume for the fourth quarter to come below the levels seen in the fourth quarter of 2019 (excluding the benefit of volume added by the Cooper Tire acquisition) due to the component and materials shortages that have limited automobile production globally. Supply chain disruptions have hindered the ability to ship products to locations where there are no manufacturing plants as well, which is not a promising sign.
For full-year 2021, the raw material cost is expected to increase to a range of $450 million to $475 million even with the benefits of raw material cost-saving measures. Natural and synthetic rubber prices and other commodity prices are volatile, so estimates could change significantly based on fluctuations in the cost of these raw materials and foreign exchange rates. In any case, it is reasonable to expect the benefits of price and product mix to continue to exceed the negative impact from high raw material costs in the fourth quarter, helping the company deliver strong earnings.
Inflationary pressure from incremental wage hikes, transportation costs and energy costs will also hurt corporate earnings in the fourth quarter, but most of these challenges are likely to be temporary obstacles.
According to Expert Market Research, the global tire market is well positioned for further growth and is expected to expand at a compounded annual growth rate of 4% through 2027, similar to the growth rates seen in the last five years. The global tire market is being driven by the expansion in the production and sale of vehicles in emerging economies, leading to an increase in the number of vehicles in use. Lightweight vehicle tires will be in high demand as the growing middle class in emerging nations such as India look for vehicle ownership for the first time in their lives, while high-income families in these regions will look to upgrade to more advanced vehicles.
Takeaway
Goodyear is facing short-term challenges, but its long-term outlook remains promising. The company is cheaply valued in the market at a forward earnings multiple of 10.67. The company is likely to reward long-term shareholders handsomely with carefully planned acquisitions and cost-saving initiatives.
This article first appeared on GuruFocus.