Was Goodyear Tire & Rubber's Q1 Just a Speed Bump or Something Worse?

Early this morning Goodyear Tire & Rubber Company (NASDAQ: GT  ) announced its first-quarter results, which sent some investors heading toward the door. As investors bailed, Goodyear's stock price fell more than 8% in premarket trading before recovering a couple of percentage points by late morning. Let's take a look at the financial numbers, the cause of the weaker-than-expected earnings, and whether or not this is a mere speed bump for the tire maker or something worse.

By the numbers
Let's get the dry numbers out of the way. Starting from the top, revenue fell 8% to $4.47 billion, which fell short of analyst expectations of $4.8 billion. Goodyear Tire & Rubber reported a $58 million loss in the first quarter, or $0.23 per share. But when adjusted to exclude one-time items, Goodyear posted earnings of $156 million, or $0.56 per share, which still checked in $0.04 per share below expectations. Let's look at the main culprits for the weaker than expected top- and bottom-line results.

Goodyear's top-line revenues were clearly affected by the harsh winter weather that slowed sales throughout the industry. Goodyear supplies tires to original equipment manufacturers, or OEMs, on a just-in-time basis, which means as sales of vehicles slow, there's little to no inventory buffer and Goodyear's revenues are directly and immediately affected. In addition to the slowdown in vehicle sales that dampened Goodyear's revenue from OEMs, its business with large replacement tire customers slowed as retailers suffered from slower consumer traffic. In the graph below, you can see how drastically January's weather affected Goodyear's results.

Source: Slide 5 of Goodyear's first-quarter presentation.

Now, to explain Goodyear's net loss in the first-quarter.

Investors knew Venezuela would be a drag on profits; it just wasn't clear how much it would be. There were two factors behind Goodyear's struggles in Venezuela. First, the tire maker recorded a $132 million charge related to the drop in the value of the Venezuelan bolivar -- that knocked off $0.47 per share from the bottom line. Second, the company also took a $30 million hit due to labor issues, which have since been resolved with a new labor contract this month.

Despite the difficult first quarter, management remains confident it's a mere speed bump in 2014.

"We remain confident in our full-year expectation of 2 percent to 3 percent year-over-year volume growth, despite the negative impact of severe January winter weather in North America and labor and economic disruptions in Venezuela during the quarter," said Richard J. Kramer, chairman and chief executive officer, in a press release.

Silver lining
While the overall financial results were a bit weak, there were some positive takeaways as well. Goodyear posted a 210-basis-point increase in its segment operating margin, year over year, to 8.3%. If you're keeping track, that marks its fourth consecutive quarter above 8%. Also, the company's raw material cost declined 6% in the first quarter and management expects that to be a trend for the remainder of 2014. Truck tires also boost margins for Goodyear, and that looks to be a tailwind for the company as truck sales in the U.S. continue to be robust while outpacing overall industry vehicle sales growth.

Foolish takeaway
After digesting Goodyear's first-quarter results, most investors were likely pondering two questions: Is the sell-off warranted? And is this a speed bump or the beginning of a worse-than-expected 2014?

In my opinion, the sell-off from a short-term perspective is warranted to take profits; however, I believe it's only a speed bump for long-term investors. While Goodyear doesn't trade at an outlandish forward P/E ratio, investors have to consider that the stock price has more than doubled over the last year, including this 6% sell-off. Like it or not, a minor speed bump in quarterly earnings is enough for some investors to take profits and send the stock price down.

To the second question, this does appear to merely be a speed bump for Goodyear. While January weather negatively affected OEM production and sales, as well as retailer traffic, Goodyear's business rebounded sharply in the following two months. Furthermore, there's absolutely no reason to expect significant charges from Venezuela to recur.

Combine those two factors with management's confidence that its summer lineup of new tire products has positioned it better than previous years for a strong selling season, and long-term investors should take today's pullback with a grain of salt.

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Comments from our Foolish Readers

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  • Report this Comment On April 29, 2014, at 1:08 PM, yeahbut wrote:

    Not just a speed bump... here's why:

    (1) New car sales were up significantly this year and are starting to taper. Goodyear makes very good margins on the OEM business. This will taper going forward as new car sales decline.

    (2) Goodyear's largest customer is Wal-Mart. With raw material prices declining, Wal-Mart will be looking to recoup historic price increases.

    (3) Contract prices with OEM's are linked to raw material costs, which are coming down.

    (4) Tire companies pray for inclement weather to drive sales. Using bad weather as an excuse for weak sales is ludicrous.

    (5) Goodyear has been continually focusing on higher end tires and walking away from volume... They can only shrink the top line so much without cutting operating expenses.


  • Report this Comment On April 29, 2014, at 1:36 PM, TMFTwoCoins wrote:

    New car sales weren't up significantly this year until March. Also, the forecast isn't tapering off and a 9.1% increase is expected for the industry this month, though results won't be released until Thursday.

    I'll agree with the Wal-Mart issue, and while using weather as an excuse can be frustrating, I believe it's valid in this case.

    I don't see enough to warrant selling, but that's my opinion. I don't hold shares either, and don't see a reason to buy after these results, either.


  • Report this Comment On April 29, 2014, at 2:51 PM, yeahbut wrote:


    Auto industry tempers forecast for 2014 sales

    DETROIT—Here is a sure sign that executives feel a lot less giddy about prospects for new-vehicle sales than they did a year ago.

    Add up the internal forecasts of auto makers for 2014 and, theoretically, you get a total that roughly equals what analysts expect the overall market to be. And that almost never happens.

    Usually car makers expect their own brands to outperform everyone else's, especially in a rising market. So the sum of the companies' expectations far exceeds predictions about the size of the total market. It's the old story: Combined market share forecasts come to 120 or 130 percent of the market.

    Well, not so this year. The brand-by-brand forecasts, when added up, total less than 16.4 million units. That's about the same as the consensus industrywide forecast—a sign of scaled-back expectations and a growing fear of bloated inventories.

  • Report this Comment On April 29, 2014, at 3:14 PM, yeahbut wrote:

    Goodyear's business to end users (replacement tires) is bigger than their OEM business. The OEM side has been propping them up for the past few years.


  • Report this Comment On April 29, 2014, at 4:25 PM, TMFTwoCoins wrote:

    I've posted another response, and it hasn't loaded yet, I'll check back and re-write if necessary.

    In the meantime, it's also important to note that your source is dated March 13th. That's when the media was claiming the sky is falling after two months of poor sales results -- while the automakers said it was a harsh winter and to wait for demand to rebound in March, and it did, though the data was released roughly two weeks after your source was published. Y-O-Y sales look to continue higher in April, not taper off, if forecasts hold true.

  • Report this Comment On April 30, 2014, at 10:45 AM, yeahbut wrote:

    I personally bailed at $28.

    Never going back.

  • Report this Comment On May 15, 2014, at 1:03 PM, thiagorulez wrote:

    Who does Goodyear really compete with besides Michelin? As long as it doesn't affect the actual tire services, then the conflict is fine. I'm sure Goodyear has plenty of fight left. Thiago |

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Daniel Miller

As a Motley Fool Industrial Specialist, I use my marketing and business background in the automotive industry to evaluate major automakers and other large industrial corporations. Follow me on twitter for tweets about stocks, cars, sports, and anything I find amusing.

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