Analysis: Goodyear faces coronavirus crisis in weakened state

Akron, Ohio – After rolling into the coronavirus crisis in a weakened state, the price of shares of Goodyear have tumbled hard in recent weeks.

The share price decline appears to be continuing a years-long trend of amplifying the company's challenges. Already facing a huge loss in its share price before the Covid-19 crisis began, Goodyear since has been beaten down at a rate that is even more precipitous than that of a market that at times has been in free fall.

The company's shares, which were trading on Nasdaq above $20 (€18.30) less than a year ago, could be purchased in the wreckage of the 16 March crash for less than $6 a share. Then shares plunged further as markets continued to spiral downward, and by the afternoon of 18 March Goodyear shares were selling for less than $5 each. Shares were at just under $6 at the close of business on 23 March.

Between year-end 2019 and 18 March, the company's shares lost 70% of their value, falling to $4.47 a share from $15.56, exceeding even the losses of the Dow Jones Industrials Index, which lost about one-third of its value and plunged to below 20,000 from over 29,000 for that same period.

So, what gives?

It's partly the company's revenues, which have been affected by currency fluctuations, downward swings in auto production, increased raw-materials costs and poor auto markets in China and Europe.

While Goodyear's revenue has dropped to $14.8 billion last year from $19.5 billion in 2013 — a drop of 24% — that's nowhere near the pace of its stock value plunge over a much shorter period of time.

Exposure to all of those cyclical markets and other pain points that make the news often makes Goodyear the market's whipping boy when there's bad news on anything from the automotive cycle to the US-China trade war, John Healy, an analyst and managing director of Northcoast Research in Cleveland, said.

"Their stock is a bit of a unique animal," the analyst said. "It's a proxy for people's views on global GDP, on the Chinese economy, on the auto markets and on raw materials. ... Whenever investors become concerned about what's going on in any of those sectors, it impacts Goodyear's stock."

Goodyear CFO Darren Wells said there's another reason Goodyear's stock value changes so much more than its earnings: debt. With about $5 billion in debt and about $2.5 billion in shareholder equity, any change in revenue or earnings is amplified in terms of how it impacts the stock.

"Small changes in earnings have a much bigger impact on stock price than with our competitors," according to the Goodyear executive.

"A larger percentage (of earnings) is allocated to debt, and a smaller percentage is allocated to equity than a lot of stocks we're compared to. If everyone loses 10% of their earnings, a lot of companies will see their stock go down by 10%. ... Ours might go down by a third," he added.

The company has also faced stiff headwinds in recent years, Wells noted, including fierce gusts from a rising dollar.

"We were $19 billion in revenue then (2010) and at $15 billion now. ... Of that $4 billion move in revenue, about $2.5 billion of it was foreign exchange. A lot of it is in emerging-market businesses where the US dollar just strengthened very dramatically," Wells said, adding that the dollar also rose in value against China's yuan.

"It wasn't just that the foreign businesses were selling less; just that when you translated it back to US dollars it was worth less," the CFO explained.

That was the biggest driver of Goodyear's lost revenues, but not the only factor, he said.

The company got out of Venezuela in 2018 as that country tipped into political turmoil and a faltering economy.

In 2015 it dissolved a 16-year joint venture with Sumitomo Rubber Industries Ltd., which meant that Goodyear got out of the motorcycle tire market.

Wells said those two moves took about $500 million in revenue off the books.

Also, in 2017 and 2018, Goodyear saw the prices of its chief raw materials, including synthetic rubber and carbon black, rise.

Finally, in 2019, the company faced an age-old nemesis: a downward turn in the automotive cycle that affected how many tires it sold, including in the US, where demand had been holding up relatively well. This time, that was compounded by a U.S.-China trade war.

"When we started 2019 ... we were starting out expecting 2% global growth in replacement tires and effectively flat automotive production," Wells said.

"That's where the year began. In the second half, the industry weakened and we ended up getting no growth in replacement, ... and a 7% decline in automotive demand. That's how significantly different the year turned out."

All of those factors caused investors to react negatively toward Goodyear's stock, according to Healy at Northcoast Research.

Goodyear also wiped out former unfunded obligations to its health and pension plans, Wells said. That means the company won't be saddled with those costs in the current downturn, but also created much of the $5 billion in debt, he explained.

Going forward, Goodyear hopes that some of its recent strategic moves will pay off, Wells said, including going after OE fitments on new vehicle platforms, especially SUVs and light trucks, whose owners have proved more brand loyal when seeking replacements later than other car segments.

"While this decline has been like 9 million units (tires sold) over the course of four years, between now and 2022 we have an increase of 7 million units based on fitments we've already won," Wells said.

"We knew there would be this dip as we transitioned. Unfortunately, it happened at a time when global OE production was declining, but there was really no way of knowing that would happen."

Healy praised the company's strategy in terms of going after new vehicle platforms that both he and Wells said will bring in higher margins than some of the business Goodyear has ceded.

"I don't think the Goodyear situation is a dire one. I think their stock gets pushed around because it's a proxy for how people feel about a lot of different things," Healy said.

Now, of course, Goodyear and other companies are confronted by a whole new challenge in the form of a pandemic. It's too soon to say how long that will last or how deep its impact will be.

Goodyear has announced it's halting production in China, Europe and the US, but has not yet said how the situation will impact its earnings.