Investing in publicly traded tire companies will suit value investors who are comfortable with a mature and low-growth industry. It is essential to emphasize that this should not be viewed as a critique of the sector. It's a fascinating industry full of the subtle nuances that make up value investing decisions.
If you're looking for a high-growth industry where revenue growth is king, then look away now. However, if you love cheap stocks in an unloved transportation sector, then tire and rubber industry stocks could be for you.
The market
Before delving into the details of the market's dynamics and how to profit from it, here is a list of some leading tire manufacturers. The top players form a fairly diverse group. It's challenging to determine exact profit margins in the industry, measured here in terms of earnings before interest, taxes, depreciation, and amortization (EBITDA), since some of these companies also operate substantial other businesses.
Company | Country | 2024 sales | 2023 EBITDA margin | Notes |
|---|---|---|---|---|
Bridgestone (OTC:BRDCY) | Japan | $29.2 billion | 19.4% | A global player with around 42% of sales coming from the Americas. |
Group Michelin (OTC:MGDDY) | France | $29.3 billion | 16.1% | Diversified tire manufacturer making tires for light vehicles, vans, trucks, agriculture, transportation, aerospace, and motorcycles. |
Goodyear (NASDAQ:GT) | U.S. | $18.9 billion | 10.1% | No. 1 in the U.S. after its acquisition of Cooper Tires. |
Continental (OTC:CTTA.Y) | Germany | $43 billion | 13.2% | Planned spin-off of automotive solutions business in 2025, then of its rubber and plastics business, leaving a core tire business, which represents 35% of total sales. |
Sumitomo Rubber (OTC:SSUM.F) | Japan | $8 billion | 14.7% | About 84% of sales are from tires. |
Pirelli (OTC:PLLI.F) | Italy | $7.3 billion | 20.9% | Generates around 81% of its revenue from high-value tires, so its margin is relatively higher. |
A mature industry
In a sense, the tire industry is representative of a mature, low-growth industry. Such industries are typically characterized by relatively low growth, emphasizing growth through consolidation and wringing every bit of operational efficiency from tire and rubber manufacturing. Additionally, companies can expand their growth into new territories or end markets.
For example, the Goodyear/Cooper deal is highly complementary. Cooper was particularly strong in the original equipment market (OEM) in China and the replacement market in the U.S. At the same time, Goodyear is very strong in the U.S. OEM and replacement market.
Consolidation has long been a feature of the industry. Major landmark deals include Bridgestone's purchase of U.S. tire manufacturer Firestone in 1988, Michelin's acquisition of Uniroyal Goodrich in 1989, and the Goodyear/Cooper deal. In addition, a minor player such as Yokohama Rubber (OTC:YORU.F) demonstrated the willingness of tire makers to expand into other categories with its acquisition of Alliance Tire Group (off-highway tires) in 2016.
In addition, Continental (OTC:CTTA.Y) plans to separate its automotive products business by the end of 2025, followed by the separation of its rubber and plastics business, resulting in a tire-focused company as the remaining entity. This could lead to further industry consolidation and result in a more focused tire company in Continental.
Low growth is still growth
One interesting aspect of the tire business is that sales are a combination of original equipment manufacturing (OEM) and replacement sales. The last point leads nicely into a key industry point that value investors will appreciate: The industry is not quite as cyclical as you might think.
It's no secret that the key metrics to follow in the industry are global car production and the number of miles driven. OEM tire sales depend on light vehicle production by automotive manufacturers, so when car sales decline, tire manufacturers are likely to experience a drop in sales. For the replacement tire market, the key is more cars being driven, since driving more miles results in increased wear and tear on tires.
However, the number of miles driven tends to be relatively more resilient. The balance of OEM and replacement demand provides some long-term stability to the marketplace. For example, approximately 72% of Goodyear's sales came from the replacement market in 2024.
All told, it's reasonable to expect a combination of underlying replacement demand and long-term growth in OEM tire demand to lead to at least low single-digit revenue growth in the industry.
Cost pressures
Another way tire manufacturers can improve earnings is by lowering costs. The most variable cost, raw materials, moves with the price of oil. Raw materials accounted for 45% of Goodyear tires' cost of goods sold in 2024, and approximately 70% of the raw material price is influenced by oil prices.
It's a similar story at Michelin, where only steel cord and natural rubber materials aren't exposed to the price of oil. As a result, tire company margins came under pressure when raw material prices surged from 2020 to 2022.
Consequently, it's worth keeping an eye on raw material prices and considering tire manufacturers as a group of stocks worth considering when the global economy is growing and there is moderate raw material price inflation.
A sector to invest in
These low-growth characteristics mean tire and rubber stocks will never be valued on the kind of earnings multiples that a high-growth software company will command. However, there are no prizes for only buying highly rated stocks, and investors can still generate high returns from stocks moving from undervalued to fair value.
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That's a consideration that springs to mind when looking at the mid-single-digit enterprise-value-to-EBITDA multiples (where enterprise value equals market cap plus net debt) that most of the sector, including Goodyear, Michelin, and Pirelli, trades on.
A combination of steady, albeit unexciting, long-term revenue growth prospects, along with some margin expansion through ongoing consolidation and cost-cutting, could generate excellent returns for investors over the long term. That argument should resonate with Goodyear investors as the company builds scale and plays catch-up with Bridgestone and Michelin in terms of margin.
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