Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Is Goodyear a Value Investment?

The Goodyear Tire & Rubber Co (NASDAQ: GT) could be a value investment because it is cheap.

Goodyear was the third largest tire manufacturer in the world with $15 billion in tire-related sales in 2018, Statista estimates. However, Mr. Market was paying $14.93 a share for Goodyear stock on 17 January 2019.

The value case for Goodyear is simple. The automobiles of the future will need tires whether they run on diesel fuel, gasoline, or electricity. Furthermore, autonomous vehicles will still need tires.

Goodyear will provide the tires if people drive different vehicles. For instance, today’s pickup trucks and SUVs need tires, just as the passenger cars and station wagons of the 1970s did.

Consequently, there will be a market for Goodyear’s signature product no matter what direction the auto industry goes in. Amazon (NASDAQ: AMZN) delivery vans and Tesla (NASDAQ: TSLA) cars and cybertrucks will need tires.

Is Goodyear Making Money?

Goodyear (NASDAQ: GT) is making some money. The tire maker reported a quarterly gross profit of $837 million on 30 September 2019.

In addition, Goodyear reported a quarterly operating income of $265 million and a quarterly net income of $90 million on the same day. However, Goodyear reported a quarterly ending cash flow of -$54 million on 30 September 2019.

That means Goodyear is not generating cash from its business, despite an operating cash flow of $165 million for the quarter ending on 30 September 2019. Goodyear reported a financing cash flow of -$22 million for that period. That means Goodyear could borrow money to pay bills.

As a result, Goodyear reported $868 million in cash and short-term investments on 30 September 2019. That number was down from $917 million on 30 June 2019 and $896 million on 30 September 2018.

Why Manufacturers sell themselves

Hence, Goodyear is struggling to generate enough cash to sustain its operations. Interestingly, many other American manufacturers find themselves in the same boat.

Many manufacturers solve this problem by selling themselves to private firms such as Cerebus Capital Management or Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B). Other companies; such as Fiat-Chrysler (NYSE: FCAU) merge with foreign companies. Chrysler first merged with Fiat and then with France’s PSA Group.

The reason manufacturers take these moves is obvious; cash. Cerebus claimed to have $42 billion in assets on 15 January 2020. Meanwhile, Stockrow estimates Berkshire Hathaway (NYSE: BRK.A) had total assets of $788.482 billion and $74.776 billion in cash and short-term investments on 30 September 2019.

Will Goodyear Sell itself?

Given these realities, Goodyear could sell itself to Berkshire Hathaway or a private equity firm. In addition, Goodyear could merge with a rival such as Japan’s Bridgestone, Germany’s Continental, France’s Michelin, or Japan’s Sumitomo Rubber Industries.

Given these realities, Goodyear could sell itself to Berkshire Hathaway or a private equity firm. In addition, Goodyear could merge with a rival such as Japan’s Bridgestone, Germany’s Continental, France’s Michelin, or Japan’s Sumitomo Rubber Industries.

An event that could force Goodyear to sell itself is an interest rate increase. Currently, interest rates are low because the Federal Reserve keeps cutting them. However, Kansas City Fed President Esther George thinks America’s central bank will have to raise interest next year, MarketWatch reports.  

The Fed cut interest rates from 1.5% to 1.75% in fall and summer of 2019. However, debt could become cheap if the US goes into recession.

Negative Interest Rates are bad for Industry

Goldman Sachs (NYSE: GS) Chief Economist Jan Hatzius thinks the Fed could implement negative interest rates during a recession, CNBC claims. In negative interest rates, a central bank pays lender to issue debt and people to borrow.

I think negative interest rates will make things worse because companies such as Goodyear will borrow more money than they can pay off. Hence, it will hasten the sale of industry to foreign companies, private equity, or big-time investors such as Warren Buffett.

I think direct payments of cash to average Americans; such as basic income or Social Security increases, could be a better means of stimulus. Unfortunately, zero interest rates are one of the few stimulus methods that does not require an act of Congress.

Zero Interest Rates are Probable in America

To explain, a basic income or a Social Security increase needs to pass both houses of Congress and get signed by the President. I think approval of a basic income is impossible in today’s political climate, while a Social Security increase is unlikely.

The Fed can implement Zero Interest rates with a simple vote of its Board of Governors however. Given the gridlock on Capitol Hill, I think Zero Interest rates are probable in America which could lead to catastrophe.

For example, I believe Zero Interest rates will cause American businesses to take on vast amounts of new debt they can never pay off. Additionally, many businesses will refuse to borrow money or spend which will cause no stimulus.

When Zero Interest Rates end, the businesses will go bankrupt or sell themselves to avoid bankruptcy because they cannot pay the higher interest rates. Cynics will allege that private equity, Wall Street, and Berkshire Hathaway, could profit from that but Main Street will suffer.

A major problem is that most of the zero interest rate money will go straight into the pockets of private equity investors or corporate executives. To explain, a business could use the Zero-Interest rate loans to buy robots to replace workers and kill jobs. Thus, the business could make more money while fewer Americans have income.

Is Goodyear a Good Investment?

Goodyear (NYSE: GT) is a good income investment because it paid a 16₵ value investment on 31 October 2019.

Additionally, credits Goodyear with five years of dividend growth. Goodyear shares delivered a dividend yield of 4.26%, an annualized payout of 64₵, and a payout ratio of 27.7% on 17 January 2020.

Moreover, I think Goodyear could be an acquisition target which could increase its share value. Thus, Goodyear is an interesting value investment, despite its limited ability to generate cash.

Investors can make money from Goodyear stock but they need to be careful with it because of the company’s limited ability to make money.