The Goodyear Tire & Rubber Co. (NYSE: GT) is HOLD.
GT shares have slightly underperformed over the last three months, gaining 9.8% compared to a rise of 10.6% for the S&P 500. The beta on GT is 2.16.
On October 30, Goodyear reported 3Q revenue of $3.5 billion, down 9% from the prior year. The lower revenues were driven by lower industry volume, unfavorable currency translation, and reduced sales from other tire-related businesses, partly offset by improved price/mix. Adjusted earnings came to $24 million or $0.10 per share, down from $105 million or $0.45 per share a year earlier. We had expected a loss of $0.20 per share.
A long with the results, management provided an outlook for 2020. Although the company expects continued challenging industry conditions, CEO Richard Kramer noted that conditions had improved from the second quarter and exceeded expectations. However, management expects the fourth quarter to be difficult amid a still surging pandemic. The e-commerce and mobile installation business is growing and replacement volume in China has increased. However, replacement volume in the U.S. has lagged the industry. It expects the negative impact from other tire-related businesses to moderate in 4Q, with a year-over-year earnings decline of $20-$30 million.
EARNINGS & GROWTH ANALYSIS
In 3Q20, overall tire volume fell 9% to 36.6 million units, with original equipment volume down 9% and replacement volume down 9%. On a geographic basis, net revenue fell to $1.82 billion from $2.05 billion in the Americas, to $1.16 million from $1.21 billion in EMEA, and to $486 million from $548 million in the Asia-Pacific region.
FINANCIAL STRENGTH & DIVIDEND
The company had total liquidity of $4.2 billion, including $1.01 million in cash and cash equivalents, at the end of 3Q. Net debt totaled $5.7 billion and the debt-to-total capitalization ratio was 71%.
MANAGEMENT & RISKS
Richard Kramer has served as the chairman and CEO of Goodyear since 2010. Darren Wells became the company’s CFO in September 2018.
Investors in GT shares face risks. Like other global tire companies, Goodyear faces risks from volatile commodity prices, currency movements, and interest rates, and from its ability to access external capital. It is also subject to risks from product liability issues, supply disruptions, government regulation, and labor agreements.
Valuation based on current-year P/E is meaningless given our loss estimate for 2020.
On December 4, HOLD-rated GT closed at $11.08, up $0.58.