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Goodyear (GT) Appears a Risky Bet for Short-Term Investors

Tire giant Goodyear Tire GT has been having a rough run on the bourses since quite some time and is unlikely to show any major improvement in the near term. Uncertainty and volatility have been making the operating environment difficult for Goodyear since the onset of the COVID-19 pandemic. Shares of the company have plunged 47% on a year-to-date basis, wider than the sector’s decline.

In the last reported quarter, the company snapped its earnings beat run. Till the second quarter of 2022, Goodyear had been on a hot earnings streak, chaining together eight consecutive EPS beats. In the third quarter of 2022, Goodyear reported adjusted earnings per share of 40 cents, missing the Zacks Consensus Estimate of 61 cents. The bottom line also declined 44.4% year over year.

During the last reported quarter, the company battled various headwinds, including persistent inflation. Tire volumes were weaker than expected, the industry environment in Europe was tough, and adverse foreign currency translations and cost inflation, including energy, labor and transportation, hurt the bottom line. Discouragingly, the headwinds are not likely to abate anytime soon. In fact, considering the rising energy price in Europe and low volumes, Goodyear now expects cost inflation to peak in the fourth quarter.

The company expects commodity costs to be up by about $500 million in the fourth quarter. For the first half of 2023, the company expects year-over-year cost increases of $300-$400 million. The year-on-year effect of other inflationary cost pressure is also expected to persist, driven by energy, transportation and labor costs.

Additionally, the firm is making substantial amounts of investment and capital spending in order to develop technologically advanced offerings. It anticipates 2022 capital expenditure in the band of $1-$1.1 billion, higher than $981 million recorded in 2021 on account of upgrades for more complex tire designs and brownfield expansions. Rising capex trends are likely to clip cash flows.

Unfavorable foreign currency translation is also likely to play spoilsport. The effect of foreign currency exchange impacted last reported quarter’s operating income to the tune of $9 million due to U.S. dollar strength. Goodyear expects continued adverse forex impacts on profits in the near term.

While the North America and Asia Pacific segments are still in good shape, Goodyear is witnessing a significantly weaker industry environment in Europe. Low tire volumes and continued inflation, including rising energy costs are impacting the segment’s profitability. In response to softer demand, the company intends to reduce fourth-quarter production in the region. The company also anticipates winter weather conditions to limit fourth-quarter volumes. The segments sales and profits declined year over year in the last reported quarter and we expect the weakness to continue in the near term.

Also, the elevated leverage of the firm restricts its financial flexibility. As of Sep 30, 2022, long-term debt and finance leases amounted to $7,839 million, up from $6,648 million on Dec 31, 2021. Notably, Goodyear’s long-term debt-to-capital ratio of 0.60 is higher than the auto sector’s 0.35.

While GT might have strong long-term prospects owing to the Cooper Tire buyout and electrification strides, the near-term outlook remains muted. Considering the current pessimism, we believe investors would do better to stay away from this stock now.

The Zacks Consensus Estimate for 2022 earnings implies a year-over-year decline of 31%. The consensus estimate for EPS has been revised downward by 64 cents in the past 30 days. GT currently carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

If you wish to invest in the auto space, the following stocks should be on your watchlist.

PACCAR PCAR: PACCAR is one of the leading names in the trucking business with reputed brands like Kenworth, Peterbilt and DAF. PCAR's accelerated efforts toward electrification and connected vehicle services are set to boost prospects. PCAR sports a Zacks Rank #1.

The Zacks Consensus Estimate for PACCAR’s 2022 sales and EPS stands at 21.6% and 53.2% growth each from the respective year-earlier reported numbers. PCAR has a Value Score of B. The stock’s earnings exceeded estimates in each of the last four quarters, the average being 12.6%.

Harley-Davidson HOG: One of the leading motorcycle makers in the world, Harley-Davidson is currently focusing on motorcycle models and technologies that better align with the market trends. HOG's Hardwire plans look to improve effectiveness and contribute to revenue growth.

The Zacks Consensus Estimate for Harley-Davidson’s 2022 sales and EPS is pegged at 7.5% and 12.4% growth each from the respective year-ago reported figures. HOG has a Zacks Rank #2 (Buy) Value Score of A. The stock’s earnings surpassed estimates in three of the last four quarters and missed once, the average surprise being 43.24%.

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The Goodyear Tire & Rubber Company (GT) : Free Stock Analysis Report

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