The Strait of Hormuz is seemingly open, or at least so at the time of writing. The price of oil is down sharply, and shares in Goodyear Tire & Rubber Co (GT 2.92%) are up 7.1% on the day by 4 p.m. It's not all a coincidence. Here's why.
Goodyear loves a lower price of oil
There are two, possibly three, main factors to consider. First, raw materials account for a significant portion of Goodyear's costs (roughly 45%), and of that figure, about 70% comes from oil prices. Consequently, investors immediately pencil in better margins for Goodyear when oil prices drop.
NASDAQ: GT
Key Data Points
Second, the majority of tire sales (aboot 790%) actually go to the replacement market, and when the price of oil is high, and the crack spread (the difference between the cost of crude oil and gasoline) is also high due to scarcity of crude for refiners, then the price of gasoline is also high enough to start deterring driving. That's bad news for the auto aftermarket, including tire sales.
Third, gasoline accounts for a significant share of discretionary spending for lower-income consumers , and that will hurt their ability to drive more or replace tires. Everything points to lower oil prices being a positive for Goodyear.
Image source: Getty Images.
Where next for Goodyear
As fellow writer Sean Williams notes, Goodyear stock is now in value territory, and if the Iran conflict-related sell-off is over, now could be a good time for value-oriented investors to take a look at the stock.
