Facing several short-term challenges, this well-established leader in its industry has a positive long-term outlook.
Earnings were down in the latest quarter, but the company’s revenue rose thanks in large part to premium products generating higher profit margins. Continued research and development, expanding sales in Asia and replacement demand in the U.S. should work in the company’s favour. Meanwhile, it trades at just over 8 times projected earnings, and the dividend yields 2.4%.
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GOODYEAR TIRE & RUBBER CO. (Nasdaq symbol GT; www.goodyear.com) is one of the world’s largest tire makers. It has 47 production plants in 21 countries.
For the three months ended June 30, 2018, the company earned $150 million, or $0.62 a share, excluding one-time items. That’s a drop of 15.3%, from $177 million, or $0.70, a year earlier.
The earnings decline was partly due to slowing vehicle sales in North America. Higher raw material costs, mostly due to rising oil prices, also contributed.
Revenue rose 4.2%, to $3.84 billion from $3.69 billion. While Goodyear sold fewer tires overall, it sold more high-profit-margin premium tires.
Goodyear plans to test tire components in space as part of a microgravity project at the International Space Station later this year. It will work with the Center for Advancement of Science in Space (CASIS) the non-profit organization that manages the space station for NASA.
The company believes that by gathering knowledge from the microgravity experiments, engineers and scientists can determine if the company should take a closer look at precipitated silica for its tires. The ultimate goal is to take that knowledge and apply it in order to improve fuel efficiency and traction. Goodyear is a long-time NASA partner.
Value Stocks: Company stands to benefit from U.S. demand for tire replacement
The company also continues to develop connected tires, which will use embedded sensors to let a driver know when they need to be serviced or replaced. Goodyear’s own exclusive algorithms will drive that technology.
In November 2017, Goodyear acquired Germany’s Ventech Systems GmbH, a leader in automated tire inspection technology. As vehicles, including buses, trucks and cars, drive over Ventech’s PneuScan device, the system measures their tire pressure, tread depth and vehicle weight.
The Ventech acquisition adds to Goodyear’s fleet management business, particularly in Europe, the Middle East and Africa. Aside from fuel costs, the care and maintenance of truck tires is one of the largest contributors to operational costs for commercial fleets. With this latest purchase, the company will more efficiently help fleet operators identify tire-related safety issues.
In August 2018 Goodyear completed its fleet of new state-of-the-art blimps when it christened Wingfoot Three (numbers one and two were introduced in 2014 and 2016, respectively). The blimps give the company a highly visible presence on the ground along one of the busiest highways in the U.S., the I-405 freeway.
The company faces a number of near-term challenges. These include a continued rise in raw material costs, a stronger U.S. dollar that cuts the contribution of foreign sales, and softening market conditions in China.
Still, the long-term outlook for Goodyear is positive. Replacement tire demand should rise given a U.S. vehicle fleet that is old by historical standards. As well, outside of China, Asia is an expanding market for the company.
With the December 2017 payment, Goodyear raised its quarterly dividend by 40.0%, to $0.14 from $0.10. The shares now yield 2.4%. The stock is trading at just 8.2 times the $2.88 per share it is expected to earn in 2018.
Recommendation in Stock Pickers Digest: Goodyear Tire & Rubber is a buy.
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