2023-08-03 10:58:58 ET
Summary
- Goodyear Tire & Rubber's shares dropped nearly 10% in after-hours trading after reporting disappointing financial results for Q2 2023.
- Revenue declined by 6.6% and profits turned into a net loss of $0.73 per share, missing analyst forecasts.
- The company experienced a decline in the number of tires shipped and faced inflationary pressures, impacting profitability metrics.
- Even so, it's making progress elsewhere and still offers attractive upside potential.
Times are rather tough for shareholders of The Goodyear Tire & Rubber Company ( GT ). Shares of the company dropped 1.5% on Aug. 2. But that paled in comparison to the nearly 10% decline that shares experienced in after-hours trading that day. Management reported financial results covering the second quarter of the 2023 fiscal year. Unfortunately, results significantly missed forecasts, with revenue and profits declining year over year as well. Cash flow also was challenged. As a shareholder myself, this is quite painful. But at the end of the day, I don't believe that the fundamental picture for the company has changed. At least, not in the long run.
A painful quarter
Getting into the earnings release, I was rather optimistic regarding my investment in Goodyear Tire & Rubber. Unfortunately, that optimism was squashed by some rather painful financial results. During the quarter, revenue for the business came in at $4.87 billion. That's 6.6% lower than the $5.21 billion that the company reported one year earlier and it was $300 million lower than what analysts anticipated . This was in spite of the fact that revenue per tire for the company actually increased. The pain, then, was really the result of two things. Less significant was the impact involving foreign currency fluctuations. Those hit sales to the tune of 2%. The bulk of the pain, however, came from a 10.7% decline in the number of tires shipped by the company. These dropped from 45.6 million in the second quarter of 2022 to 40.8 million the same time this year.
Author - SEC EDGAR Data
This is not the first time that the company has experienced some pain when it comes to the number of units shipped. During the first quarter of the year, management dealt with softening industry demand and reported a decline in the number of units produced totaling 3.7 million. This was a larger reduction than the 3.2 million units decline from the 45 million units that were sold in the first quarter of 2022 to the 41.8 million that were sold the same time this year. Most of that pain fell under the replacement tire category, though some of it was driven by a reduction in shipments to original equipment manufacturers. The fact that the picture seems to be worsening on a year over year basis from quarter to quarter is definitely a cause for concern.
Goodyear Tire & Rubber Company
As painful as the top line was, the bottom line for the company was even worse. The company generated a net loss of $0.73 per share. That compares to the $0.58 per share profit that the company booked in the second quarter of 2022. This translated to a decline in overall profits from $166 million to negative $208 million. Analysts had been forecasting profits per share of $0.61. So the company easily missed forecasts there. On an adjusted basis, the picture was a bit better. The company generated and adjusted loss per share of $0.34, which was $0.50 per share lower than what analysts thought it would be.
Goodyear Tire & Rubber Company
Management provided a look into the causes behind the decline in profits for the business. For instance, the reduction in volume cost the company $94 million in segment operating profits. Unabsorbed fixed costs associated with volume declines added another $54 million to this. The company also suffered from inflationary pressures that hit the bottom line to the tune of $98 million. This is on top of other inflationary pressures totaling $102 million. There were other costs involved as well that, combined, hit the company to the tune of $111 million. Some of this, about $50 million, was due to inclement weather that should not be repeated moving forward. It's worth noting that the picture could have been worse. But increased pricing that the company lobbed onto its customers, combined with a change in product mix, helped offset these declines to the tune of $219 million.
Thanks to these issues, other profitability metrics for the company suffered during the quarter. The one exception to this was operating cash flow. It skyrocketed from $178 million to $341 million. However, if we adjust for changes in working capital, we would get a massive reduction from $370 million to only $10 million. Another profitability metric, EBITDA, also took a beating, declining from $685 million to $174 million. As you can see in the chart below, results experienced in the second quarter of the year were instrumental in pushing down overall results for the first half of the year in its entirety. Revenue, profits and cash flows are all down significantly on a year-over-year basis.
Author - SEC EDGAR Data
This is not to say that we haven't had some positive developments as of late. Although debt year to date is up nearly $1.10 billion on a net basis, it did decline by $168 million relative to the first quarter. It also was down $605 million on a net basis compared to what the company reported in the second quarter of the 2022 fiscal year. This is not to say that debt will no longer be a problem. With the net amount standing at $7.76 billion, it's still quite lofty and it's something that management should be very active to deal with.
Earlier this year I wrote an article about Goodyear Tire & Rubber wherein I talked about how the company had been targeted by activist investor Elliott Investment Management about making some rather significant changes aimed at creating meaningful value for shareholders. In that article, I walked through their analysis and validated it as being reasonable. The overall belief is that shares could be worth as much as $32 apiece if management makes some rather drastic changes.
Well, in its quarterly release, the company reiterated what it had announced on July 25 of this year. And that is they have reached an agreement with Elliott whereby three new board members that are mutually agreed upon between the company and the investment firm have decided to join the company's board of directors. And as part of this, the company has established what it calls a Strategic and Operational Review Committee aimed at overseeing and supporting the board as it reviews strategic and operational alternatives aimed at optimizing shareholder value. As part of this agreement, Elliott has agreed , among other things, to not increase their ownership of the company above 9.9% or increase their economic exposure, including when combined with other parties, to more than 15%. This protects Goodyear Tire & Rubber from being overthrown by the activist investor and ensures that the parties remain aligned for now.
Takeaway
Normally in cases like this, I would love to perform a valuation of the company in question. But the extreme volatility of financials makes any sort of analysis more guesswork than actual value-added analysis. So on that matter, I will stand down for now. I'm not going to lie. The fact of the matter is that the second quarter was awfully painful. However, I'm encouraged by the company's debt reduction and the fact that it has decided to play ball with Elliott. For as long as the activist investor angle is still in play, I would argue that there exists significant upside potential for investors. But of course, this is not the kind of prospect that's going to be stable in the meantime. So anybody who does decide to allocate capital like I have should make sure to understand this if the decision is made to keep shares and let this process play out.
For further details see:
Goodyear Tire & Rubber: That Was Painful