With a stock that is up 45% since the beginning of the year and has tripled since mid-2006, is the world's third-largest tire maker still a good value?
A tenuous situation
For several years now, Goodyear (NYSE:GT) has been teetering on the precipice of bankruptcy. At the beginning of the year, the tire maker's debt stood at $7.2 billion, up from $5.4 billion the year before. It has unfunded pension obligations exceeding $2.4 billion. Making tires is not a high-growth industry, and intense competition from Cooper Tires (NYSE:CTB), Michelin, Pirelli, Bridgestone, Continental, and others has led to tight margins.
It hasn't helped that America's automakers have gone into a deep slide. General Motors (NYSE:GM) seemed as if it was inexorably sliding toward Chapter 11 protection, and Ford (NYSE:F) got lost in the Way Forward turnaround plan it concocted. The woes of the U.S. automakers contributed in part to the decline of sales at Goodyear's North American segment, where units sold have fallen by more than 6% annually.
More than just tires
Certainly, on the face of it, there still appears to be plenty of tread wear left. Net sales in 2006 were approximately $20 billion, although they were coupled with a loss of $330 million. While it's best known for its tires, Goodyear also manufactures power transmission belts, hoses, and other rubber products for the transportation industry, as well as operating one of the world's largest commercial truck service and tire retreading centers. It also operates 1,800 tire and auto service center outlets.
Its far-flung facilities are found in 28 countries, and it has marketing operations in almost every country on the globe. The company employs 77,000 people worldwide.
In addition to settling the strike with the United Steelworkers, Goodyear announced the closure of two facilities, one of which was related to manufacturing private-label replacement tires. As part of its plan to focus primarily on making tires, it sold its tire fabric plants, opting instead to contract with the buyer for supplies.
Turnaround gets traction
Goodyear implemented a turnaround strategy that actually took hold. By selling off unrelated businesses, slashing costs, and continuously seeking out lower-cost areas to make its tires, the company found a firm foothold.
Concessions granted by the unions have been key. While the strike cost the company dearly -- $361 million last year and an estimated $205 million to $240 million this year -- the tire maker can shut down unproductive plants and save huge sums of money going forward.
Under the settlement, management made an immediate $1 billion contribution toward retirees' medical benefits. It then scrapped pension plans for new hires while implementing 401(k) plans and raised retiree health-care premiums, both of which should save it $90 million annually. Goodyear's trying to save $1 billion annually by 2008, and the moves should reduce pension obligations by $100 million and other retirement benefits by $525 million. There could also be additional plant closings overseas.
The moves have caught the eye of the debt rating agencies. Fitch's just raised Goodyear's rating from negative up to stable. Even though a portion of its $3.9 billion cash balance was used to pay down $873 million of a $1.5 billion first-lien credit facility in January, the remaining cash will help fund additional pension contributions of as much as $750 million and capital expenditures of $750 million to $800 million. Fitch says Goodyear can improve its liquidity even more by selling off more assets and raising money through an equity offering.
The tire maker has already announced it wants to sell off its engineered products division, which could raise about $1 billion, proceeds from which could continue to fund the pension trust. Some analysts also predict Goodyear may offer more common shares this year in an attempt to raise an additional $1 billion.
At more than $30 a share, the stock has not traded at these levels since 2001. It's certainly a far cry from the days not too long ago when it was trading at around $4 a share. Shares trade at about 11 times next year's earnings and are offered at discounts to both competitors and the industry.
Goodyear has an expansive presence overseas, meaning it has already made the investments in lower-cost countries that others, like Cooper, are making now. Still others, like Michelin, are confronting higher labor costs. As cost savings moves increase and their ripple effects multiply, I still find plenty of upside potential in Goodyear's shares.
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Fool contributor Rich Duprey owns shares of both Goodyear and Ford, but he does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
