If you looked at Goodyear Tire & Rubber Co.’s stock price, which has been trading at multiyear lows and shaved billions of dollars off of the company’s market value, you might think the company was in trouble.

But the Akron tire maker remains profitable. It is innovating on a number of fronts, introducing new tires and upgrading existing tire factories.

Yet Goodyear and others in the tire industry have been hit with headwinds that include rising raw material prices, an out-of-investor-favor automotive sector, a strong U.S. dollar and economic weaknesses in key markets that include China and Europe.

The stock prices of other major tire makers such as Bridgestone and Michelin also have fallen on hard times, although Goodyear shares have dropped the most in recent years.

While Goodyear continues to make money, recent quarterly finances haven’t met investor expectations — something that typically leads to share selloffs.

Industry analysts Anthony Deem and John Healy said Goodyear’s stock has dropped because of numerous reasons.

Deem, with Independence-based Longbow Research, said Goodyear’s shares are hurting in part because of economic and industry factors and also in part because of some company decisions.

“There’s a lot going on,” Deem said.

He said the company’s fundamentals in the Americas are solid while international markets are weak.

Deem, who does not own any Goodyear shares, rates the company’s stock performance as “underperform” in his latest report, with a $14 price target.

Monday, shares closed at $13.87, up 46 cents, or 3.4 percent, putting the company's value at a bit over $3.1 billion. Over the past 52 weeks, shares have traded at a high of $25.82 to a recent low of $13.24. The last time Goodyear stock closed below $13.24 was in 2013.

“Our industry is in a down cycle — not the first, and certainly not the last,” said Goodyear spokesman Ed Markey. “While macroeconomics are affecting our results today, we’ve experienced similar situations in the past and always emerged successful and stronger for the challenge.”

Deem said the auto industry faces a skeptical earnings outlook for now in part because of a weak China economy and low car sales there.

U.S. tariffs on Chinese goods will have little to no impact on Goodyear because the company makes tires in China for that market and not for export into the United States, Deem said.

Rising raw material prices also are hurting tire makers such as Goodyear at a time when many of the companies cannot raise tire prices enough to offset the costs, he said. A global oversupply of tires is acting to depress prices, he said.

Deem said in a May report it appears that Goodyear won’t see recovery from the higher raw material prices for the next couple of years.

 

Looking at debt

Goodyear has been too optimistic in its financial forecasting as well, he said.

Goodyear’s finances also are weighed down by billions of dollars in corporate debt, Deem said. Company executives several years ago made a decision to use cash to buy back Goodyear stock instead of cutting debt, he said. (The company also has ample amounts of cash on hand and available credit to meet expenses.)

“I think they missed the opportunity a few years ago to reduce debt and interest payments,” Deem said.

Goodyear has taken steps to address the tire oversupply issue by planning to modernize two tire factories in Germany and replace about 1,100 jobs with automated production, he said. The company will replace 5.5 million low value-added tires made at those plants with 2.5 million in higher value-added tires, Deem said. Goodyear may take steps to modernize plants in North America, too, he said.

Analyst John Healy at Northcoast Research in Cleveland agreed with Deem that tire companies are being hit by a number of factors, including so-called cyclical issues — regular highs and lows — that the industry goes through.

In Goodyear’s case, Healy said the company’s profits are probably two-thirds of what the investment community believes they should be, he said.

“It’s really about where profits are to where people had hoped,” he said.

Goodyear's U.S. replacement tire sales appear to be doing well and Goodyear executives continue to say they have a plan to address ongoing issues and invest for the future, he said.

“But ultimately, they can’t make the China economy better,” he said.

Goodyear Chairman and Chief Executive Officer Rich Kramer, in talking with industry analysts in late April on the company’s first quarter results, touched on the company’s challenges, successes and opportunities.

“We entered the year with renewed focus on the elements of our business that we can control and influence including our operating execution, the efficiency of our manufacturing facilities, our cost structure, and product and business model innovation,” he said.

 

Positive steps

Kramer noted that recent U.S. consumer replacement tire shipments grew 6 percent, outpacing many competitors. Commercial replacement truck tires also grew, he said.

Goodyear is making “transformational” investments to modernize its two German factories in upcoming years, with the lessons learned there applicable to other Goodyear global facilities, Kramer said.

Goodyear also continues to put money into changing technology and evolving consumer preferences, Kramer said. Goodyear is investing in data and fleet management technology, is expanding its online tire sale program to include commercial tires, and the new TireHub e-commerce business, in partnership with Bridgestone Americas, is a success, he said.

Goodyear also is testing a new tire retail format, Roll by Goodyear, that blends online, brick-and-mortar and personal service.

“We’re managing our business for the long term and are more excited and optimistic about Goodyear’s strategy and future opportunities than ever,” Goodyear’s Markey said. “We will continue to lead the industry in anticipating and meeting changing consumer preferences as the next generation of mobility develops. You can see clear evidence of this in our new national distributor, TireHub, our new retail format, Roll by Goodyear, and our leadership in understanding and serving the needs of emerging consumer fleets.”

 

Jim Mackinnon covers business. He can be reached at 330-996-3544 or jmackinnon@thebeaconjournal.com. Follow him @JimMackinnonABJ on Twitter or www.facebook.com/JimMackinnonABJ.