Whether as consumer products or as an investment thesis, few really think about tire companies, which places a distinct spotlight on Goodyear Tire (GT). Usually a background player on Wall Street, the popular tire manufacturer has enjoyed recent upside momentum in the capital market. Nevertheless, if a recession materializes, the narrative could quickly subside. I am moderately bearish on GT stock.
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Fundamentally, Goodyear Tire operates at a perplexing juncture in the broader equities space. Irrespective of which automotive propulsion platform wins the sector – electric or combustion – every vehicle needs tires. In that respect, Goodyear is basically permanently relevant.
At the same time, few really focus on GT stock, and for good reasons. Since its initial public offering back in 1982, data from Google Finance reveals that Goodyear’s lifetime return is a tad over 11%. That’s just not going to get too many folks excited.
Nevertheless, GT stock is up about 22% in the past 30 days. While some factors bolster the idea that Goodyear can keep moving forward, other headwinds challenge this concept.
Interestingly, on TipRanks, GT has a 4 out of 10 Smart Score rating. This indicates moderate potential for the stock to slightly underperform or perform in line with the broader market, going forward.
GT Stock Gets a Boost from Q2 Earnings
Almost two weeks ago, Goodyear disclosed its results for the second quarter. The company reported adjusted earnings per share of $0.46, exceeding the consensus target calling for $0.36. Higher-than-anticipated sales in the Americas and Asia Pacific segments helped lift the earnings tally. Moreover, the bottom line increased nearly 44% from the year-ago result of $0.32.
Regarding its top line, Goodyear posted revenue of $5.21 billion, representing a 31% rise from the year-ago quarter. As well, the total beat Wall Street’s consensus target of $5.07 billion. This was the highest Q2 revenue the company experienced in the past decade. The increase in revenue came from higher selling prices, more sales, and the acquisition of Cooper Tire.
As previously mentioned, one of the highlights was the Americas segment. Here, Goodyear reported sector revenue of $3.15 billion, approximately 40% higher on a year-over-year basis. In addition, the figure topped analysts’ consensus estimate of $2.99 billion.
On the Asia Pacific side, Goodyear posted revenue of $568 million, representing a 15% year-over-year lift. As well, the tally beat the consensus target of $566 million. However, investors should be aware that operating income was $19 million, a reduction of 17.4% year-over-year. The main culprits were high raw material costs and inflationary pressure.
Following the Q2 report, GT stock swung higher conspicuously before encountering some volatility. In the past few days, GT stock printed red ink, particularly as investors realized that the Federal Reserve will likely maintain its aggressive monetary tightening.
Goodyear Enjoys Fundamental Relevance
Adding to the bullish implications of Goodyear’s Q2 report, the underlying business enjoys fundamental relevance. Until people stop using tires to drive from one place to another, GT stock will at least occasionally draw some interest.
One of the critical factors supporting Goodyear’s optimistic thesis is the average age of cars on U.S. roadways. Per The Wall Street Journal, this metric hit 12.2 years, a record high. Essentially, this narrative translates to people holding onto their cars for as long as possible to avoid costly replacements.
Of course, this concept gets a little tricky. In some respects, investors of GT stock benefit from a consumer economy that features people more frequently buying replacement vehicles as this suggests more discretionary funds available, and that framework would bode well for Goodyear since tires aren’t exactly cheap.
At the same time, replacing worn, bald tires is a less-costly expenditure for customers. For instance, evidence indicates that a majority of drivers ignore check engine lights (and likely other in-car warning signals). However, bald tires are less easily ignorable, particularly for people living in regions featuring dynamic weather events.
Just try to drive on bald tires in the rain once, and you’ll quickly understand how valuable well-kept functional tires are.
The Trade-Down Effect Hurts GT Stock
While Goodyear may have several factors lifting sentiment for its bullish stakeholders, prospective investors should consider the company’s vulnerability to the trade-down effect. In short, Goodyear is a premium tire manufacturer facing competitive pressures from budget tires.
“To use a basic example, people who buy discretionary items through membership-only retailers like Costco (COST) could trade down to non-membership entities like Target (TGT). Should economic pressures sustain, they might trade down again to Walmart (WMT). Should circumstances continue to worsen, these same consumers could end up at discount retailers like Dollar Tree (DLTR).”
Should economic circumstances stay relatively stable, GT stock might not be overly exposed to the trade-down effect. However, prior dynamics suggest that should the economy slow down, Goodyear may be in trouble.
Even a decade-old article from Journal-News reported that recessions could impose hardships on specific segments of the auto repair industry. “With the economy, there’s people not fixing things that really, really need to be fixed,” said Eric Pohlman of Eric’s Auto Service in Hamilton. “They’re driving with a bald tire, a loose front-end part, and that’s dangerous.” That statement is still relevant.
In other words, when financial circumstances sour, drivers also put off tire replacements, even if doing so is incredibly dangerous. However, if push does come to shove, financially strapped consumers will probably opt for budget tires, not Goodyear tires.
Is Goodyear Stock a Good Buy?
Turning to Wall Street, GT stock has a Moderate Buy consensus rating based on one Buy and two Holds assigned in the past three months. The average GT stock price target is $18.33, implying 29.3% upside potential.
Conclusion: Interesting, but Not Compelling
Perhaps the best way to describe GT stock is that its recent momentum is interesting but not compelling. While Goodyear has performed better than expected, a recession really hasn’t proven to be a winning catalyst for the company, particularly because it operates on the wrong end of the trade-down effect.
