Goodyear Tire & Rubber Company

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 2/5

Goodyear Tire & Rubber Company is a global tire manufacturer, focused on replacement and OEM markets, with a significant presence in key global regions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Goodyear Tire & Rubber Company (GT) is a leading global tire manufacturer, established in 1898. The company’s operations are segmented geographically into three main regions: Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific. These segments cover the full spectrum of tire product categories, such as replacement, original equipment, and retread tires for automobiles, trucks, buses, motorcycles, earthmoving equipment, and aviation. Goodyear’s strategy is focused on creating value through brand management, innovative products, customer satisfaction, and distribution networks.

  • Revenue Distribution:
    • Americas: Primarily focused on North America, the Americas segment is generally seen as a mature market. Sales in this region is dominated by replacement tires. The original equipment (OE) segment is dependent on vehicle manufacturer’s sales volume.
    • EMEA: This market experiences a more balanced sales distribution between original equipment and replacement. Goodyear is focused on expanding its higher value-added tire segment, with increased market presence in both mature and emerging economies.
    • Asia Pacific: The fastest-growing tire market, characterized by increased sales in both OE and replacement markets. This includes emerging economies such as China, India and Southeast Asia.
    • Global: the overall global sales are split roughly: 50-55% from replacement tires and 45-50% from original equipment. Approximately 30-35% of Goodyear’s overall sales are from the American region, 35-40% from EMEA region, and around 25-30% from Asia Pacific.
  • Industry Trends: The global tire industry is characterized by a high degree of competition, with a few dominant global players. Key trends include the increasing popularity of electric vehicles which require high performance, low rolling resistance tires which are being addressed through new technologies. Additionally, the industry is seeing growing adoption of sustainability measures in the production and recycling of tires, which are leading to new government regulations and consumer expectations.
    • The tire market is heavily influenced by the automotive industry, especially in the OE market. Consumer preferences such as growth in the SUV and truck segments, are also impacting the demand for tire sizes and types.
    • The replacement tire market is also highly sensitive to economic conditions, especially consumer income.
    • Overall, the tire industry is a very capital-intensive industry that is highly cyclical in nature. The industry has a high barrier of entry due to high capital expenditures needed to start up a large scale manufacturing facility.
  • Competitive Landscape:
  • Michelin: The largest tire manufacturer in the world. It is very diversified and is known for premium high-performance tires.
  • Bridgestone: A major global player. Known for a wide product portfolio and a focus on high-quality tires. * Continental: The second-largest tire manufacturer in Europe. Known for innovation and is very strong in the OEM sector.
  • Pirelli: Focused on premium, high-performance tires. Historically very strong in Formula 1 sponsorships.

  • Goodyear: Has a strong brand recognition and good performance in the truck, bus and motorcycle markets. It is also working toward building innovative and sustainable tires to keep its competitive edge.

  • What Makes Goodyear Different:
  • Strong Brand Recognition: Goodyear has been one of the most recognized and highly regarded brand in the tire industry for over 100 years.
  • Focus on Innovation: Goodyear has worked on developing more environmentally friendly, higher performance tires to maintain its market position.
  • Balanced Geographical Presence: Goodyear operates in a wide array of markets and economies.
  • Strong Market Share in Commercial Segment: A large portion of Goodyear sales comes from the truck, bus and motorcycle markets.

Moat Analysis: 2/5

Goodyear has a relatively weak moat, primarily consisting of brand and scale. Here’s a breakdown of the assessment:

  • Brand (Moderate): Goodyear has a long-standing brand and good reputation for quality and reliability; but it does not enjoy the same brand premium as Michelin. The brand does improve the company’s ability to charge premiums.
  • Scale (Moderate): Goodyear’s scale allows the company to produce tires more cost-effectively, but the company is not as efficient as larger players such as Bridgestone.
  • Switching Costs (Low): For most consumers, switching between tire brands is easy and at low cost, given the availability of multiple alternatives. For a niche segment like racing, switching costs are higher, but the market share for that segment is negligible.
  • Network Effects (None): Goodyear’s business is not associated with network effects.
  • Intangible Assets (Low): Although the company is developing newer technologies and patents, it is not unique enough to create a long-term advantage.

Moat Risks and Business Resilience:

Here are the risks that can harm Goodyear’s moat and business resilience:

  • Raw Material Prices: The fluctuating costs of raw materials, such as rubber, oil, and other petrochemicals is a very large threat. These price changes impact margins and reduce profitability.
  • Counteract: Through better pricing contracts and product innovations and efficiency improvement on resource use.
  • Competition: Intense competition from major players and new entrants could reduce the company’s market share and pricing power.
  • Counteract: Focus on innovation and brand recognition to compete.
  • Cyclicality: As the tire market is heavily influenced by the demand of the automotive and broader market, there is large cyclical nature in the sales, which can impact ROIC and margins.
    • Counteract: Increase revenue through a broader and more diverse product line and markets. Develop more sustainable and technologically advanced tires.

Financial Analysis:

Goodyear’s financials reveal a mixed picture of some strengths and areas of concern. Here’s an analysis:

  • Revenue and Growth: Although there is a moderate revenue growth over the last decade, the company is very sensitive to fluctuations of the business cycle. Revenue fell dramatically in 2020 due to the COVID-19 crisis. The company has had negative growth in the past (especially the European segment), and needs to stabilize its market share and grow sales in a more consistent manner.
  • Profitability: Goodyear is struggling to maintain its margins and profitability. The costs from operations are very volatile due to fluctuations in prices of key materials. Although the company has made effort to cut costs, its expenses still require large proportions of total revenue.
  • ROIC/ROA: Have a good positive trend in the last 2 years, as the company is bouncing back from the economic downturn caused by COVID-19.
  • Margins: After the COVID-19 crisis, margins are starting to increase slowly, but still underperform most of their competitors. Gross profits are fairly stable.
  • Liquidity and Capital Structure:
  • Goodyear has a very high debt burden that has been growing in the recent years to fund acquisitions and capital expenditures.
  • Liquidity remains adequate, with a large portion of assets in the form of inventories and receivables. This does increase the chance that the company might need to raise additional funding at unfavorable conditions.

Here is a summary of 3 different financial ratios that indicate the volatility of Goodyear’s numbers over a 10-year period.

  • Revenue growth has varied from -11% to 16% (volatile)
  • Net earnings margin has varied from -12.7 % to 6.3% (volatile)
  • ROIC has varied from 0.8% to 12.3% (volatile)

Recent Concerns/Controversies

  • In the latest earnings call of Q3-2023, the company has noted decreasing sales volumes which is impacting its margins and its cash generation capabilities. Goodyear is targeting to increase its sales in key markets and focusing on high value-added tire segments.
  • Goodyear has cited concerns about volatility in the raw material prices and logistics costs as affecting its operating profits. To mitigate this, the company is trying to cut costs by reducing SG&A expenses.
  • The company is also shifting its production facilities to more lower-cost countries in order to reduce the overall cost of products and increase profitability.

Understandability: 2/5

The business operations are not highly complex, but require a good understanding of the industry and its cycles, and the company’s numerous partnerships. The wide variety of products as well as the nature of geographical revenue distribution may be hard for someone new to the business to fully understand. The business is further complicated by fluctuations in material prices, currency exchange, and the competitive landscape.

Balance Sheet Health: 2/5

Goodyear’s balance sheet has a lot of room for improvement and is concerning due to high levels of debt. They do have strong cash reserves at the moment which gives a cushion to debt liabilities and they have high intangible assets that represent strong brand recognition.

  • Debt Burden is High: Total debt is greater than the total equity of the company. A lot of this debt also has high interest rates and can come with risk of increased expenses over the near future if interest rates stay up for long period.
  • Intangible assets: A big portion of assets are intangible, with large amortization amounts every year.
  • Cash reserves : Although relatively high, it’s hard to determine if it’s enough, given the state of the debt.
  • Current Liabilities are high, showing less ability to pay off any liabilities immediately.

Here are some key takeaways that indicate that the balance sheet is not healthy.

  • Their long term debt has an interest rate ranging from 5.37% to 8.3%.
  • Total Long Term debt amount is 6.5 billion.
  • Total current liabilities are around 5 billion.
  • Total current assets are around 4.2 billion.