Goodyear Tire & Rubber's (GT 0.85%) quarterly earnings came in better than expected, but the company still has a lot of work to do before it returns to the fast lane. Shares of Goodyear traded down about 13% as of 10:30 a.m. ET after the company detailed the challenges it sees up ahead.
A bad year for tire demand
The automotive market is sputtering, which is having an impact on demand for tires. Goodyear reported fourth-quarter earnings of $0.47 per share, beating the $0.36-per-share consensus thanks to strong pricing relative to the cost of raw materials. But sales of tires fell by about 3.8% in 2023, and the company sees global tire volumes falling by about 2% in the current quarter.
It's not all bad news, as Goodyear does expect raw material costs to be down year over year. But Goodyear is also battling through one-time issues, including a fire at its Poland facility that is expected to shave about $15 million from operating income.
Goodyear ended the year with $7.6 billion in total debt, down slightly from $7.8 billion in total debt at the end of 2022.
Is Goodyear a buy after its disappointing quarter?
There is only so much Goodyear can do in the near term as it fights against softening global demand trends, but management is focused on the longer-term future. Last year, the company outlined about $1 billion in cost reduction actions including streamlining its facilities footprint and improving purchasing and supply chain management.
It also sees about $300 million in potential earnings improvement through better pricing.
By the end of 2025 Goodyear hopes to have its transformation plan complete, seeking to reduce its debt to about 2 times earnings before interest, taxes, depreciation, and amortization (EBITDA) and generate 10% operating margins.
But that plan will take time, with just 30% of that $1 billion in cost savings expected to be realized in 2024. Investors buying in now face a long wait for improvement, and the potential for further downside if the global economy falters and demand for tires falls further.
Goodyear is an industry leader and management appears to have a firm grasp on the challenge ahead. But given the extended timeline here, there is no reason to rush in and buy on this dip.
