Goodyear Tire Stock: Bargain Buy or Time to Junk It?

Key Points

• Goodyear Tire is the nation's largest tire manufacturer and the fourth-largest in the world.
• Elliott Management owns a 10% stake and helped create the Goodyear Forward transformation plan, which they believe can lift shares to $32.
• Goodyear reported a Q2 2024 profit but missed on revenues, causing shares to tumble nearly 40% in the following days.

Tire manufacturer Good Year Tire & Rubber Co. NASDAQ: GT has not had a very good year. Shares recently hit 52-week lows at $7.63, trading down 40.2% year-to-date (YTD). Despite being the largest tire manufacturer in the United States, the company continues to suffer from sales declines. Shares toppled nearly 40% following the earnings report, posting weaker-than-expected revenues for the second quarter of 2024.

Macroeconomic and Industry Pressures Weigh on Goodyear's Prospects

Goodyear was bleak about the industry environment facing macroeconomic pressures. Industry-specific pressures include original equipment manufacturer (OEM) production level downgrades, a challenging replacement tire market, and saturation from low-end imports. The company doesn’t expect things to improve for the rest of 2024. The question is if the worst case is already priced into the stock.

Good Year operates in the auto/tires/trucks sector and competes with Bridgestone Co. OTCMKTS: BRDCY, Continental Aktiengesellschaft OTCMKTS: CTTAY, and Compagnie Générale des Établissements Michelin SCA OTCMKTS: MGDDF.

Will Elliott Management Step Up?

Activist investor Elliott Investment Management LLP made headlines for its perceived role in the surprise Starbucks Co. NASDAQ: SBUX CEO appointment of Chipotle Mexican Grill Inc. NYSE: CMG CEO Brian Niccol. They’re making headlines again for a proxy fight to replace the majority of the Board of Directors for Southwest Airlines Co. NYSE: LUV.

Elliott Investment took a 10% stake in Goodyear Tire and sent a letter and presentation to the Board of Directors on May 11, 2024. The company succeeded in convincing the Board to add three new directors and adopt its transformation plan titled Goodyear Forward.

Turnaround Plan: Goodyear Forward 

On Nov. 15, 2023, Goodyear revealed its Goodyear Forward, a turnaround plan created in collaboration with Elliott Management. The plan involves selling off non-core assets in excess of $2 billion, cutting costs by $1.3 billion by the end of 2025, doubling segment margin to 10% by 2025, and achieving 2x to 2.5x net leverage by the end of 2025. Elliott Management had made the case that Goodyear could be worth over $32 a share under the plan. This lifted shares as high as $15.24 by Dec. 14, 2023. Since then, Goodyear has reported three lousy quarters of earnings, resulting in shares sinking 45% lower. Elliott Management has been relatively quiet since then.

GT Stock Triggers a Market Structure Low Signal

The daily candlestick chart for CRUS triggered a market structure low (MSL) buy signal above $7.98. An MSL is formed after a series of at least four consecutive lower low candles followed by the lowest low candle and then a higher low candle. The high of the higher low candle set the MSL buy trigger. In GT's case, the MSL's lowest low was $7.63, and the buy trigger formed at $7.98. A stop loss is set on the breakdown back below the lowest low at $7.63. The daily relative strength index (RSI) bounced back up to the 35-band. Pullback support levels are at $7.98, $7.63, $6.67, and $5.73.

Goodyear Hits a Pothole But Follows Its Transformation Plan  

Goodyear reported Q2 2024 EPS of 19 cents, beating consensus estimates by 5 cents. Net income was $85 million. Revenues fell 6.1% YoY to $4.57 billion, missing the consensus estimates of $4.78 billion. America's segment operating income (SOI) margin was 8.9%. Asia Pacific SOI was 10.6%. The Goodyear Forward transformation initiatives delivered $90 million.

While sales slumped, the company was able to squeeze out a profit of 19 cents, an improvement over the loss of 34 cents in the year-ago period. The profit was a mix of price/mix, transformation plan, and $63 million in insurance claim recoveries. Americas saw sales fall 8.2%, and tire unit volume drop 5.9%, driven by lower replacement tire volumes and continued weakness in commercial trucks and contractual price adjustment. 

Goodyear Will Sell Its Off-the-Road Business

Goodyear CEO Mark Stewart commented, "We demonstrated clear progress on our Goodyear Forward plan in the second quarter, achieving significant margin expansion and securing a definitive agreement to sell our Off-the-Road business."

Yokohama has agreed to buy the business for $905 million in cash. The deal is expected to close in Q1 2025.

Goodyear Tire and Rubber analyst ratings and price targets are at MarketBeat. There are four analyst ratings on GT stock, comprised of three Buys and one Hold. Consensus analyst price targets point to a 101.2% upside at $17.23. Shares trade at 8.88x forward earnings.