Scary stuff, this investing. Credit markets could send the stock market careening. Housing stocks blow apart like a trailer in a tornado's path. And one of the top-performing industries of the past year that, pundits say, is set to unravel like a retread peeling off on Route 66. What's an investor to do?
While it's been tough to bet against Goodyear Tire
Investors have been spooked by Goodyear's returns all the way up, though. In May of last year, I wrote that tire makers looked like they were ready to roll, and pointed to Goodyear's particular position, but I was thinking most of the industry stood out like whitewalls on a '57 Cadillac.
Before the industry took a breather toward the end of this summer, it was indeed turbocharged and was the best-performing industry. Cooper Tire & Rubber
Yet that growth has flattened over the past few months, and there are a few conditions that might slow Goodyear even further.
Petroleum is a material ingredient in 60% of the products used to make tires, and, as of late 2005, a $1 per gallon boost in the price of oil costs Goodyear $20 million. Over the past year, crude oil prices have risen 67%, from $55 a barrel to more than $90 a barrel now. There's a limit to what Goodyear and the other tire makers can pass along to consumers. Other raw material prices may be improving, but with oil as the dominant component of tires, profit margins will suffer.
The industry is also facing increased competition from Asian tire makers. While Goodyear has manufacturing operations at more than 90 facilities in 28 countries, tires made in world markets are intended for those markets, even those from its plant in China. So it cannot expect to realize any cost savings here from tires made overseas. With higher labor costs from its unionized workforce, Goodyear might suffer market-share losses to lower-cost competitors.
While it did get the health-benefit obligations off its balance sheet with the creation of a union-run health-care trust fund -- a strategy General Motors
In its last quarterly report for the period ended June 30, Goodyear had more than $5 billion in debt and capital lease obligations. Sure, that's better than the $6.5 billion that was weighing it down the year before, but almost $3.6 billion of that will be coming due within the next few years unless it can renegotiate terms, something it has been working on.
In addition to these structural scarecrows, fellow Foolish colleague Selena Maranjian noted these scary facts about Goodyear recently:
- Five-year average annual sales growth: 7.4%, vs. 13.9% for the S&P 500.
- Dividends: Eliminated in 2003 to cut costs.
- Return on assets: A skimpy 2.7% from 2001 through 2006.
- Net profit margins: A negative 2.8% average over the same period.
The top U.S. tire maker also has valuation issues that might creep out an investor. While it trades at an enterprise value-EBITDA premium to its rivals, its EBITDA margin is only about half that or less than that of Continental and Bridgestone.
I've owned Goodyear's stock for several years now and have enjoyed significant price appreciation. Although it's currently discounted about 25% from its 52-week high, at these levels, Goodyear is offers limited upside and some scary downdraft potential. An investment here might be a toxic brew.
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Fool contributor Rich Duprey owns shares of Goodyear and Ford but does not have a financial position in any other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy of tricks and treats.