Pros and cons of investing in tire stocks
The main advantage of tire stocks is their ability to generate relatively stable revenue since about 70% of demand comes from the replacement market. There's a possibility that the growth of EVs (which tend to be heavier and harder on tires) will accelerate over the long term.
On the down side, it remains a capital-intensive industry subject to significant variability in input costs, such as rubber (oil).
The bottom line
These low-growth characteristics mean tire and rubber stocks will never be valued at the kind of earnings multiples a high-growth software company commands. However, there are no prizes for buying only highly rated stocks, and investors can still generate high returns from stocks that move from undervalued to fair value.
That's a consideration that springs to mind when looking at the mid-single-digit enterprise-value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) multiples that most of the sector, including Goodyear, Michelin, and Pirelli, trades on.
A combination of steady but unexciting long-term revenue growth prospects, along with margin expansion from ongoing consolidation and cost-cutting, could generate excellent returns for investors over the long term.