What can rise faster, the company's blimp or its stock? Source: Wikimedia Commons.
When you think of tires, you probably think of the ones on your car and leave it at that. But The Goodyear Tire & Rubber Company (GT -1.14%) wants you to know that its opportunities extend far beyond that. The company sells tires for replacement and original equipment across the globe for automobiles, trucks, buses, aircraft, earth movers, farm equipment, and more in addition to selling chemicals and natural rubbers. Growth has been challenging in years past, but here are three reasons The Goodyear Tire & Rubber Company's stock could rise in the coming months and quarters.
1. Growth in Asia, Latin America
Tapping into emerging markets comes with unique risks and opportunities, but the general strategy seems to be working for tire manufacturers. The Goodyear Tire & Rubber Company has performed exceptionally well in the Latin America and Asia Pacific regions. Consider the performance of tire sales for each region, which has led to increasing operating profits (discussed below):
|
2013 |
2012 |
% of Total Units (2013, 2012) | |
|---|---|---|---|
|
Latin America |
17.9 million tires |
18.1 million tires |
11%, 11% |
|
Asia Pacific |
21.9 million tires |
20.6 million tires |
13.4%, 12.6% |
Source: SEC filings.
While growth in Latin America would appear to be slowing at first glance, investors should know two things. First, most vehicle tires in the region are manufactured in the region, while imports only have a fraction of the market share. That means The Goodyear Tire & Rubber Company will have to invest in its manufacturing presence in the region before it sees significant growth, considering it's currently generating 11% of total tire units sold from just 9.5% of its manufacturing floor space.
Second, the company sells 69% of its tires through independent dealers. That doesn't necessarily help the company's products stand out, but new labeling requirements will. Brazil will require tire certification and labeling for rolling resistance, wet grip, and noise for all passenger car, light truck, and commercial truck tires sold in the country by 2016, while labels begin rolling out for new tires sold in the second quarter of 2015. Labeling all tires will make it easier for consumers to make side-by-side comparisons, which will make the superior quality and offerings of The Goodyear Tire & Rubber Company's products stand out, especially when it comes to rolling resistance.
Meanwhile, the Asia Pacific region is quickly becoming the best-performing region for the company. Region sales accounted for 13.4% of total units sold, despite accounting for just 11.5% of total manufacturing floor space. As we'll see below, Asia Pacific also boasted the highest operating margin.
2. Fuel efficiency mania
Drivers in developed nations such as the United States are driving fewer and fewer miles every year, but they're more focused on fuel efficiency than ever before. While the trend in miles driven isn't necessarily great news for The Goodyear Tire & Rubber Company, the attention being paid to fuel efficiency is fantastic news. The company has enjoyed early success with its Assurance Fuel Max tires, which have much lower rolling resistance coefficients than previous generation tires.
Source: The Goodyear Tire & Rubber Company.
What the heck is rolling resistance? It's the tendency of your tires to deform when you accelerate, increasing friction and lowering fuel economy in the process. The new tire formulations can boost fuel economy by 4% over their 65,000-mile lifetime, which saves up to 2,600 miles' worth of fuel. You can bet that will be a key marketing angle featured on the new labeling requirements in Brazil.
3. Improving operating margin
Perhaps the best reason for The Goodyear Tire & Rubber Company's stock to rise is an improving operating margin. Consider the operating margin performance broken down by region in each of the last three years.
|
2013 |
2012 |
2011 | |
|---|---|---|---|
|
North America |
8% |
5.3% |
2.8% |
|
Europe, Middle East, Africa (EMEA) |
4.5% |
3.7% |
7.8% |
|
Latin America |
13.7% |
10.7% |
9.3% |
|
Asia Pacific |
13.8% |
11% |
9.8% |
|
Total |
8.1% |
5.9% |
6% |
|
Total Operating Profits |
$1.58 billion |
$1.25 billion |
$1.37 billion |
Source: SEC filings.
Overall, things should only continue to improve for the company with great performance in key growth regions (Latin America, Asia Pacific) and more efficient operations in core regions (North America). The closing of a large manufacturing plant in France this year is expected to boost EMEA operating margin by 25% on an annual basis compared to 2013, but Europe continues to be a thorn in Wall Street's side.
Foolish bottom line
While it's easy to overlook a tire manufacturer as an investment opportunity, especially given the relatively pedestrian growth and total sales figures, there are several good reasons The Goodyear Tire & Rubber Company's stock could rise in the coming months or years. An increased presence in fast-growing regions such as Latin America and Asia Pacific will help make up for lackluster performance in Europe, while premium products focused on customer demands will boost margins in North America. Of course, there are also several good reasons the company could face continued headwinds, which we'll discuss in an upcoming article.
