To The Moon

Wall Street stocks closed sharply higher on Friday as rising expectations of a December interest rate cut by the Federal Reserve offset concerns over lofty tech valuations. A broad rally started gathering momentum by late morning, pushing all three major U.S. stock indexes to substantial gains on the day.

The best-performing concepts is Tires & Rubber Concept. Considering the different perceptions of the stock, this time TigerPicks chose $Goodyear(GT)$ to have a fundamental highlight to help users understand it better.

In the past five days, $Goodyear(GT)$ 's share price has risen by 6.02%.

$Goodyear(GT)$

As a long-standing company serving customers for more than 125 years, Goodyear Tires is an American multinational tire manufacturer with 68,000+ employees, approximately 1,200 service locations, and 53 manufacturing facilities. Their primary operations include sales of tires to OEMs and directly to consumers/businesses via their store locations, where they also offer a variety of auto services.

Operational Restructuring

A rough divergence away from the S&P500 $S&P 500(.SPX)$ in the last few years has made Goodyear Tires a laggard, so let’s first talk about how we got here. It is apparent that the company has a debt problem. Their $7.5 billion ballooning debt stems from their acquisition of Cooper Tire & Rubber Company for $2.5 billion in 2021, several years of negative cash flows attributed to high spending on CapEx, and operational inefficiencies.

The chart below displays how quickly new debt is issued while coming-due debt is paid off. It is evident that in the last couple of years, the company has been actively managing its balance sheet and rolling over debt. None of their currently-issued bonds will mature until 2027. This gives the company time before they must rollover additional debt and may benefit from lower corporate yields as the federal funds rate is expected to continue to decline.

The current CEO, Mark Stewart, was appointed after the planned departure of Richard J. Kramer in January 2024. This followed the reported net loss of $89 million in Q3 and a loss of $398 million for the nine months ended. The Review Committee chose Stewart as the best fit to execute the Goodyear Forward Plan. This plan consists of operating income margin expansion from 5% to 10%, strategic alternatives to its smaller segments, and a stronger balance sheet with $1.5 billion in debt reduction set to achieve net leverage of 2.0x-2.5x by the end of 2025.

With Q3 2025 earnings being reported on Nov. 4, 2025, this is a good time to check the progress on the outlined objectives. Firstly, the company beat on adjusted EPS reporting $0.28 per share vs the consensus estimate of $0.15 per share, as well as a slight beat on revenue of $4.65 billion compared to the consensus estimate of $4.64 billion. While the stock is trading up ~10% after earnings, these metrics are still reported as -$0.08 YoY and -3.7% YoY, respectively.

Management has been able to check some of the boxes from their stated objectives as they were able to fully divest their chemicals segment for $2.2 billion, aiding in deleveraging the company. While management has made great progress in decreasing their net debt, they fell short of their goal as a quick calculation gives them a 4.0x net leverage ratio from $6.68 billion in net debt and $1.69 billion EBITDA. Unfortunately, operating margin has slightly declined to 6.2% for the quarter as pressures from the EMEA region depress margins at 2.1%, with reported 7.5% in the Americas and 10.2% in the Asia Pacific. In addition, the goal of achieving an investment-grade rating on their debt was far off, at a current rating of B+.

Key Drivers

In the near term, management expects strong free cash flow generation in Q4, part of this growth will come from the uptick in sales that Goodyear sees during the winter months. The reasoning why is simple: consumers are much more likely to consider tire replacements when road conditions are significantly more dangerous to drive.

Although headwinds remain, management has iterated “controlling the controllables” as they continue to transition towards higher margin products, with almost 1,000 new premium SKUs released this year. Mark Stewart is quoted saying,

With yesterday’s announcement on the Chemicals business, we’ve now completed our planned divestitures, and we’re bringing the balance sheet back to a position of health. We’ve introduced more premium product lines than ever before while improving organizational agility and sharpening our focus on margin and profitability. We’re positioning the business to be able to leverage those strengths as the market environment begins to normalize.

The market has seemed to refuse to recognize the benefits of the Goodyear Forward Plan, likely as adverse economic conditions, as I will elaborate on later, have taken its effect. For the fiscal year 2025, the program added an estimated $750 million in operating income, with the most impact coming from footprint and plant optimization. All of the cash received in the proceeds will go directly to paying down debt. The additional cost savings, portfolio optimization efforts, and debt reduction is all part of a long-term vision to return to strong, consistent earnings.

Transitory Headwinds

Top-line growth has been declining as inflationary pressures and varying tariff policies have taken its toll. Some of the decline in sales can be attributed to the shift away from high volume and instead an emphasis on high margin products offered by their premium tire selection. In addition, the earlier pre-buying of tires from front running the tariffs has cooled off in Q2 and Q3. While this demand has stagnated, the upwards price pressure on imports from tariffs allow Goodyear to compete with these cheaper products without lowering costs. Interestingly, low-end imports have increased as there has been a shift in demand, as well as emerging competitors from overseas that offer lower prices. Part of this decrease in premium tire demand comes from the trucking industry as the EPA’s Clean Trucks Plan looms ahead, likely to induce a drop in freight demand.

The top five tire manufacturers by revenue, listed in order, are Compagnie Générale des Établissements Michelin Société en commandite par actions (OTCPK:MGDDY) (commonly known as Michelin), Bridgestone Corporation (OTCPK:BRDCY), Goodyear, Continental Aktiengesellschaft (OTCPK:CTTAY), and Pirelli & C. S.p.A. (OTCPK:PLLIF). Despite being the 3rd largest tire company, Goodyear trades as the 13th highest company by market cap with a $2.2 billion valuation. The tire industry as a whole has seen major drawdowns from all the headwinds previously mentioned. Goodyear stock has performed the worst, down 10% YTD, due to their highly levered corporate structure. Tire companies retain most of their competitive moat in brand identity and quality. All five are known as premium brands with their own strengths and weaknesses, but competition is fierce, and Goodyear lacks the most in cost advantage.

Conclusion

Goodyear presents itself as a deep value opportunity. If management can continue to make progress towards the Goodyear Forward Plan and maintain consistent future profitability once margins are stabilized, then it will trade at a multiple more consistent to its peers. As of right now, an investment creates a unique risk-reward opportunity that I would label as high-risk and high-reward. The sub-sector has its own challenges, while Goodyear must also perform from an internal operational standpoint, creating two different uncertainties. The company itself will receive a buy rating, specifically because management has shown that they are capable of executing on the Goodyear Forward plan and due to the stock trading at an attractive multiple.

Stock Price Forecast:

Here are the target price forecasts for the next 12 months from analysts.

Based on 5 Wall Street analysts offering 12 month price targets for GoodYear Tire in the last 3 months. The average price target is $9.78 with a high forecast of $13.00 and a low forecast of $6.88. The average price target represents a 29.19% change from the last price of $7.57.

Resource:

https://seekingalpha.com/article/4841415-goodyear-tires-the-wheels-havent-fallen-off

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