Tire manufacturer Goodyear's increasing focus on efficiency and innovation could produce a successful recovery for its stock price.
The company is investing in its manufacturing capabilities, which could allow it to service demand in higher-margin categories. It is also seeking to successfully adapt to changing consumer tastes, while entering new partnerships that could widen its economic moat.
With the stock having fallen 42% in the last year, its valuation now suggests that it has investment appeal given its growth potential.
Investing for growth
Goodyear is planning to modernize its Hanau and Fulda manufacturing facilities in Germany. This is set to boost the productivity of its German plants, expecting them to have more automated production following the investment.
The modernization process also means that the facilities will be fully capable of producing consumer tires with rim diameters that are equal to, or greater than, 17 inches. This will provide the company with greater capacity to fulfil demand in what is a higher-margin market segment.
Investment in the planned expansion of its Slovenia plant will also add 4.5 million units of high value-added capacity. This will provide it with greater opportunity to meet rising demand across the premium segments of the European market.
Innovation
The company’s competitive position has been enhanced by the recent expansion of its portfolio of mobility and technology partners. This now includes Local Motors, which is a ground mobility company with whom Goodyear is conducting tire testing on autonomous vehicles. It has also recently partnered with Envoy Technologies to provide a proprietary predictive tire servicing solution to enable fleet managers to more effectively manage their servicing requirements. These partnerships will allow Goodyear to use a larger amount of data to add greater value to fleet managers in order to strengthen its offering versus industry peers.
The company is also seeking to offer increasingly innovative online solutions in order to adapt to changing customer tastes. It will launch its first commercial e-commerce pilot in the near term that will allow it to better meet the evolving requirements of commercial truck fleets and owner operators. It is also continuing to invest in its direct-to-consumer e-commerce site, TireHub, as well as Goodyear Mobile Install and Roll by Goodyear. Investment in these areas could strengthen its economic moat, with a larger proportion of global tire transactions expected to take place online over the long run.
Threats
The company’s recent performance has been negatively impacted by weakness in China, where auto sales have been under severe pressure. The country’s lower vehicle production in the second half of 2018 continued into the first quarter of the current fiscal year, with Goodyear’s original equipment (OE) volume in China declining 15% versus the first quarter of the previous year. This contributed to a reduction in group OE volumes of 8%, which was a major reason why the company’s sales fell 6% in the first quarter of the year.
Although the company’s performance in China has been disappointing in recent quarters, it reported signs of stabilization in its most recent quarterly update. Business confidence has been boosted by government stimulus, while commercial truck sales have increased as infrastructure projects grow in number. There has also been a slowing in the rate of decline of new car sales, while the consumer replacement channel has shown signs of improving demand.
Outlook
In the next fiscal year, Goodyear is forecast to post a rise in earnings per share of 29.5%. Since the stock has a forward price-earnings ratio of 7.2 using fiscal 2019’s forecasts, it appears to offer a wide margin of safety.
With the company investing in improving the efficiency and scale of its manufacturing facilities, it could enjoy higher sales and margins over the long run.
Its continued focus on innovation and in adapting to changing customer tastes may also lead to a stronger competitive position relative to sector peers.
Having fallen heavily in the last year and underperformed the S&P 500 by 43%, the stock could deliver a successful turnaround as its strategy is implemented over the long term.
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The author does not have a position in Goodyear at the time of publication
