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Image source: Michael Pereckas/Flickr.

Most people can probably identify The Goodyear Tire & Rubber Company (NASDAQ:GT) from its actual products, or, if not from its branded tires, then at the very least from its iconic fleet of "Goodyear Blimps". (The iconic blimps are the remnant of a 1924 partnership with Zeppelin that was reopened in 2011. More blimps for everyone!) Despite having a high level of brand recognition, investors may pass on the opportunity to research or invest in the company. After all, tires are pretty boring -- they're just the things you purchase only after every 60,000 miles or so of driving.

But if you care to look a little closer, you'll notice that the company is in the midst of a value-building turnaround that could return shares to historical or all-time highs in the years to come -- and perhaps even make The Goodyear Tire & Rubber Company a formidable dividend stock. Here are a few things management wants you to know after the most recent quarter.

Effects of anticipated tariff on Chinese tires

A cold wind is blowing over the tire industry, but we've seen this all happen before. In 2009 tariffs were imposed on imports of Chinese tires in an attempt to make domestic production more competitive with cheap, low-cost tires produced by state-owned or funded operations in China. That sounds great for domestic operations, but it's never so black and white. Automakers and tire distributors gobbled up large volumes of Chinese tires for several quarters prior to the tariff going into effect to lower their costs for the year ahead.

That practice led to swollen tire inventory across North America, which translated into a significant drop in demand from historical customers of The Goodyear Tire & Rubber Company. Well, get ready for an encore, as there are talks of yet another tariff to be imposed on low-cost Chinese imports beginning in mid-2015. The company pointed out the effects quite succinctly:

"The most crucial factor in the quarter [for our business in North America] was the distorted impact of the significant pre-buy of low-end Chinese tires on industry sell-in volumes to dealers and distributors in anticipation of another import tariff."

The upcoming tariff may be made retroactive to October 2014 -- a step which fueled the same behaviors that took place in 2009, and may cause a repeat in the second half of this year. For instance, there was an estimated 25% year-over-year increase in Chinese imports compared to the third quarter of last year. With the anticipatory surge in imports, overall North American demand grew 3% during the quarter. Without it, demand would have declined 4%. Similarly, the low-cost tires are taking up physical space in swollen inventories and reducing the budgets of customers.

Luckily, this isn't The Goodyear Tire & Rubber Company of 2009.

Long-term thinking

Whodathunk that focusing on the long-term would prove to be more valuable than making knee-jerk reactions?

"We didn't overreact to distorted market conditions and the spike in dealer buying patterns, we didn't chase on  profitable volume, we're not in the business of making tires to sit in customers warehouses for extended periods, and we didn't sell next year's tires at discounted prices today. Instead, we stayed focused in an environment that would have made it easy to divert from our strategy."

The result? The North American business recorded quarterly operating income of $210 million and the second straight quarter of operating margin greater than 10%. Perhaps more encouraging for investors is that demand for the company's premium products -- those at the center of the recorded quarter -- is expected to remain high.

Not all tires are created equally

Management admitted that it faced challenges meeting demand for premium products during the third quarter -- a problem that will be addressed by capacity expansion at new and existing facilities from 2015 through 2017. That's great and all, but what the heck is a premium brand tire? How difficult can it be to make higher value tires? Management wants you to know something:

"A tire is not a tire."

Allow me to expand. A high-value-added tire is more complex to manufacture than a low-value-added tire. There's no accepted definition for a high-value-added tire, but The Goodyear Tire & Rubber Company defines it as having additional tread compounds (silica), reduced sidewall height, premium speed ratings, diameters greater than 17 inches, and several more attributes.

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Image source: Deutsche Bank Leveraged Finance Conference presentation.

Being shareholder-friendly is a priority

Management has set out to make The Goodyear Tire & Rubber Company shareholder-friendly in several ways, including increasing earnings, repurchasing $450 million in shares between 2014 and 2016, and growing its dividend. The latter may just be the thing that captures the attention of investors unwilling to invest in something as boring as tire manufacturing. Unsurprisingly, it's inherently tied to (1) increasing earnings with more efficient operations and higher valued products, and (2) reducing the number of shares on the market (although this plays a significantly smaller role overall).

Management justifies its share repurchase program by stating:

"We plan to repurchase up to $150 million of our common stock in the four quarter. We believe our current stock price does not reflect the components we have in our strategy and our ability to achieve our targets."

After admitting that full-year earnings growth guidance would be near the top end of the 10% to 15% range and discussing some of the new mid-tier and premium-tier products being launched or in development, investors may want to consider soaking up some of management's optimism.

Strategy is working

It wasn't that long ago that The Goodyear Tire & Rubber Company was bloated with debt and pension obligations, inefficient operations, and an outdated product portfolio. Today there's a different feel to operations.

"We are running our business better every quarter, becoming more efficient and creating sustainable shareholder value just as we said we would. We will achieve a fourth straight year of more than $1.2 billion in earnings, something never before accomplished. That is what our strategy was built to do."

It certainly shows. Consider the growth in operating income from the lowly depths of inefficiency and The Great Recession.

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*Data through first nine months of 2014. Image source: Data from company presentation, compiled by author.

What does it mean for investors?

Current shareholders should be very encouraged by the progress being made at The Goodyear Tire & Rubber Company. The company is slowly becoming an earnings machine, thanks to increased operating efficiencies and a focus on high margin products. That will eventually translate into higher market valuations and higher dividend payouts. Of course, those are also solid reasons for any investor to take a closer look at the company. Tire manufacturing and sales may not getting any more exciting in the years to come, but the company is just beginning to hit its stride. 

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 field.

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