Is Goodyear's Stock Full Of Hot Air?
Compulsively contrarian, I'm a sucker for venerable companies in big trouble. Sometimes, as with post-perestroika General Dynamics (GD ), this impulse can pay off tenfold and more. At others (Kmart (KMRT ), circa 2001), it winds up a wipeout. Now, here comes Goodyear Tire & Rubber (GT ). After a miserable 2003 -- the stock dipped below $4 -- it's on a roll, near $9 a share. Yet it remains almost $20 below its 2002 high. Is Goodyear still a good risk?
Even Pollyanna could fill this page twice over detailing Goodyear's troubles. Upward pressure on manufacturing costs. Downward pressure on prices. Poor relations with its network of independent tire dealers. Ceaseless competition from global rivals Bridgestone (BRDCY ) and Michelin, plus such smaller but tough foes as Cooper Tire & Rubber (CTB ). It all combined in 2001 and 2002 to produce almost $1.4 billion in net losses. Through September last year, Goodyear lost another $332 million. That is, the company is pretty sure that's what it lost, as it has become a suspect source of its own financial data. After a restatement last fall of its financials back through 2000, in March it had to tweak the restatement. Now Goodyear has delayed filing its final 2003 numbers as it reexamines foreign accounts. Already the accounting mess has led the company to discipline several of its senior European managers. What had been an informal Securities & Exchange Commission inquiry is now a formal investigation.
AGAINST THIS background, why might Goodyear's shares be perking up? First, because in North America, anyway, Goodyear's financial woes haven't tarnished its brand. Second, there are solid signs that the costs of natural rubber and crude oil, which is synthetic rubber's feedstock, are moderating, even as tire prices are firming. Cooper in February hiked its prices by 3% to 5% across its product line. The company says the increases are sticking. Finally, Goodyear stoked fresh interest in its stock on Mar. 28, when it reported proprietary advances in its use of synthetic rubber. Goodyear's new polymers, Chief Technical Officer Joseph Gingo told me, will help the company cut costs via more flexibility in how much of either natural or synthetic rubber it blends into each tire. When synthetic rubber is relatively cheaper (or more expensive), Goodyear now can use more (or less) of it, altering the mix more adeptly as markets move.
Despite these reasons for hope, I'm not buying the bullish case. For one thing, Gingo was quick to tell me that whatever cost benefit Goodyear gets from its new polymers, he is sure its major rivals are working on some way to follow suit. More important, even with a single-digit stock price, Goodyear isn't cheap. To ease its financial distress, the company has rebuilt its balance sheet. The new capital structure gives Goodyear added time to work out of its jam. But between the losses it has posted and the added debt it took on, the company's net worth has worn way down. Goodyear's net debt -- that is, total debt minus cash holdings -- comes to $3.9 billion, up from $2.7 billion at the end of 2002, and almost 10 times shareholders' equity. Added to the value of its stock, Goodyear's blimped-out borrowings give the company a total enterprise value of $5.5 billion. That's nearly 15 times my estimate of its 2003 operating income.
How does that compare? Not well. Cooper, far smaller by sales, is solidly profitable and has a net worth more than double Goodyear's. Its total enterprise value is 13 times last year's operating income. Even allowing for the vagaries of different accounting rules, Michelin is a sharper contrast. The French giant has spent several years improving its balance sheet. At yearend, net debt stood at 78% of equity. Its total enterprise value comes to $10.7 billion, or eight times 2003 operating income. With some luck, Goodyear will pull out of its skid. But to stay safe, contrarians don't rely on luck.