Goodyear Tire & Rubber Co (NASDAQ:GT) managed to beat Wall Street estimates Tuesday as record operating income in North America offset weakness in Europe and a stronger dollar.
GT stock rose smartly on the news and it sure does need the help. Shares are off 8% for the year-to-date already, lagging the broader market by about 10 percentage points. Furthermore, GT stock is essentially unchanged over the last 52 weeks, and has displayed significant volatility, trading in a range of roughly $19 to $29 a share.
Goodyear Tire is one of the largest tire companies in the world, but it’s largely dependent on North America, where vehicle manufacturers have been hurting GT with price pressures. At the same time, Goodyear Tire has been expanding into emerging markets, but the sluggish global economy and rising dollar have limited any gains.
More recently, Goodyear Tire suffered a weak quarter in Europe, where sales of winter tires have dropped amid one of the warmest winters on record.
For the fourth quarter, Goodyear Tire’s net income ballooned to $2.1 billion, or $7.68 a share, from $235 million, or 84 cents, a year ago, thanks to one-time release of a $2.2 billion tax valuation allowance. Goodyear Tire pursued the non-cash tax benefit for 12 years.
Excluding the tax allowance, Goodyear Tire earnings came to 58 cents a share, which exceeded analysts’ average estimate by a penny, according to a survey by Thomson Reuters.
Revenue, however, came up slightly short of Wall Street estimates, falling 9% to $4.3 billion.
Goodyear Tire Faces Sales Slump
Declining sales have been a weight on Goodyear Tire stock, and the weakness is expected to extend into next year as well. That helps explain the seemingly low valuation for GT stock.
Goodyear Tire stock trades at about 9 times forward earnings with a long-term growth forecast of 11%. True, that’s significantly less expensive than the broader market, but it doesn’t scream bargain when sales are shrinking or staying put.
Analysts expect Goodyear Tire sales to drop nearly 4% this year and to rise no more than 2% in 2016, according to data from Thomson Reuters.
In the most recent quarter, sales were hurt by $256 million in unfavorable foreign currency translation — the dollar is at a 15-year high against the euro — and $181 million in lower sales volume in Europe, Middle East and Africa.
Original equipment unit volume fell 1%, primarily because of continued vehicle industry weakness in Latin America. Replacement tire shipments were down 4%, due to lower sales of winter tires in Europe, Goodyear Tire said.
Thankfully for anyone holding GT stock, North America pretty much came to the rescue. Segment operating income grew to $229 million from $199 million a year ago even as sales and tire units fell slightly. A substantial uptick in segment operating margin more than made up for the top-line decline. That strength in GT’s largest market allowed the company to affirm its growth targets. As Goodyear Tire CEO Richard Kramer said in a news release:
“Led by our momentum in North America, we are on target to achieve 2015 segment operating income growth of 10 percent to 15 percent above our record setting $1.7 billion in 2014, despite severe headwinds from the increasing strength of the U.S. dollar.”
That said, there’s nothing particularly compelling about GT stock for new money. The growth profile and valuation make it look like a market performer at best. That doesn’t make it a sell, but neither is it a buy.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
