3 Reasons The Goodyear Tire & Rubber Company's Stock Could Fall

A few reasons Goodyear Tire & Rubber's stock could fall in the coming months and years.

Sep 2, 2014 at 10:00AM

Goodyear Tire & Rubber (NASDAQ:GT) sells tires across the globe for cars, trucks, buses, aircraft, earth movers, farm equipment, and more, along with providing bulk chemicals and natural rubbers. Yet, despite quietly enabling the world's economy to move (literally), the company is only valued at $6.9 billion and has only outperformed the S&P 500 by 17% in the last decade when dividends are included.

GT Total Return Price Chart

GT Total Return Price data by YCharts.

Perhaps that's an unfair comparison, since the tire powerhouse only began paying dividends four quarters ago. While that could be taken as a sign of increasing business efficiency and newfound growth, it's also a testament to the challenging markets the company faces. There are good reasons for the company's stock to rise, but here are three reasons Goodyear Tire & Rubber's share price could fall in the coming months and quarters.

1. Dissolution of global alliance

Breaking up is never easy, but it has the potential to be painfully expensive for Goodyear. The company owns 75% of two companies (Goodyear Dunlop Tires Europe and Goodyear Dunlop Tires North America) as part of a global alliance with Sumitomo Rubber Industries, or SRI, which owns the remaining 25% of each. The pair own several other businesses together, with SRI always the minority partner. Unfortunately, the majority owner learned that SRI has engaged in "anticompetitive conduct" that warrants the dissolution of the partnership, and is in arbitration to wind it down.

That's not necessarily bad news. After all, Goodyear is going through a decent amount of trouble to do "the right thing" and protect its reputation. However, SRI has the right to force Goodyear to buy out its stake in all of the businesses that are part of the partnership, which is the only realistic outcome. While this is a value-driving move in the long run, especially with increasing cash flow, a higher than anticipated price tag could be a major headache for shareholders and have a major one-time impact on profits. Investors will have to wait to see if damages and other financial relief sought in arbitration will be enough to cover Goodyear's acquisition costs.

2. Europe's economic weakness

Nearly every Goodyear region improved its operating margin by at least 41% from 2011 to 2013. The outlier was Europe (also grouped with the Middle East and Africa), which saw operating margin plummet 42% from 7.8% in 2011 to 4.5% in 2013. In the same period, total tires, err, tyres, sold decreased from 74.3 million to 60.8 million, or enough to equip 3.38 million vehicles. And, no, Europe didn't incinerate millions of vehicles.

Images

What happens to the Autobahn if Europe stops replacing its car tires? Source: Darkone/ Wikimedia Commons.

Instead, weak economic growth and high unemployment have forced Goodyear Tire & Rubber to swallow lackluster performance in the region. In an attempt to combat the obstacles facing its business, the company closed the manufacturing facility in Amiens, France, in the first quarter of 2014 and will exit the farm tire business in the region. The moves are expected to improve operating income by $75 million per year , which would strengthen the region's operating margin by 25% over 2013. While this is a smart move given current conditions, Europe remains a challenging market for tire manufacturers and will continue to weigh on the business.

3. Substantial debt 

What makes having to buy out a conniving partner even worse? Not having the financial flexibility to assure shareholders that it won't be a major issue. Goodyear had $15.2 billion in total liabilities and just under $17 billion in total assets at the end of the second quarter. That high amount of debt could limit the company's ability to target growth moving forward and will limit its flexibility in reacting to significant market obstacles, such as the dismal performance in Europe.

A total debt-to-assets ratio of 89.7% could also put Goodyear Tire & Rubber at a competitive disadvantage to its peers and competitors, which could be better positioned to target growth opportunities and expand manufacturing capacity in new regions. That's especially true of manufacturers with ample government support, such as those in Latin America and the Asia-Pacific.

Foolish takeaway

No company faces an unimpeded path to growth or expansion, but there are several good reasons that Goodyear Tire & Rubber's stock could fall. If it weren't for the poor performance in Europe and the looming dissolution with SRI, investors might be taking a much more optimistic view of the tire manufacturer's future. Can you overlook those risks to tap into an improving business? 

Warren Buffett's worst auto nightmare (Hint: It's not Tesla)
A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn't one of them. He recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to ride this megatrend. Click here to access our exclusive report on this stock.

Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolioCAPS pageprevious writing for The Motley Fool, or his work with SynBioBeta to keep up with developments in the synthetic biology industry.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers