Goodyear (GT)

Global tire manufacturer Goodyear (NYSE:GT) fell short of the markets revenue expectations in Q3 CY2025, with sales falling 3.7% year on year to $4.65 billion. Its non-GAAP profit of $0.28 per share was 72% above analysts’ consensus estimates.

Company Overview

With its iconic blimp floating above major sporting events since 1925, Goodyear (NYSE:GT) is one of the world's largest tire manufacturers, producing and selling tires for automobiles, trucks, aircraft, and other vehicles, along with related services.

Much capital investment and technical know-how are needed to manufacture functional, safe, and aesthetically pleasing automobiles for the mass market. Barriers to entry are therefore high, and auto manufacturers with economies of scale can boast strong economic moats. However, this doesn’t insulate them from new entrants, as electric vehicles (EVs) have entered the market and are upending it. This has forced established manufacturers to not only contend with emerging EV-first competitors but also decide how much they want to invest in these disruptive technologies, which will likely cannibalize their legacy offerings.

Goodyear's primary global competitors are Bridgestone (based in Japan) and Michelin (based in France). Other significant competitors include Continental, Pirelli, Hankook, Kumho, Yokohama, and numerous regional tire manufacturers, along with low-cost imports primarily from Asia.

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Goodyear grew its sales at a decent 8.1% compounded annual growth rate. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Goodyear’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 5.4% over the last two years.

We can dig further into the company’s revenue dynamics by analyzing its number of units sold, which reached -0.1 in the latest quarter. Over the last two years, Goodyear’s units sold averaged 38.9% year-on-year declines. Because this number is lower than its revenue growth, we can see the company benefited from price increases.

This quarter, Goodyear missed Wall Street’s estimates and reported a rather uninspiring 3.7% year-on-year revenue decline, generating $4.65 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 1.5% over the next 12 months. While this projection suggests its newer products and services will catalyze better top-line performance, it is still below the sector average.

Goodyear has bad unit economics for an industrials business, signaling it operates in a competitive market. This is also because it’s an automobile manufacturer.

Automobile manufacturers have structurally lower profitability as they often break even on the initial sale of vehicles and instead make money on parts and servicing, which come many years later - this explains why new entrants such as Rivian, Lucid, and Nikola have negative gross margins. As you can see below, these dynamics culminated in an average 19.2% gross margin for Goodyear over the last five years.

In Q3, Goodyear produced a 18.2% gross profit margin, down 1.4 percentage points year on year. Goodyear’s full-year margin has also been trending down over the past 12 months, decreasing by 2.1 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Goodyear was profitable over the last five years but held back by its large cost base. Its average operating margin of 3.5% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

Analyzing the trend in its profitability, Goodyear’s operating margin decreased by 3.3 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Goodyear’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q3, Goodyear generated an operating margin profit margin of 3.2%, down 2.4 percentage points year on year. Since Goodyear’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Goodyear’s full-year EPS flipped from negative to positive over the last five years. This is encouraging and shows it’s at a critical moment in its life.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Goodyear, its two-year annual EPS growth of 107% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q3, Goodyear reported adjusted EPS of $0.28, down from $0.37 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Goodyear’s full-year EPS of $0.46 to grow 162%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Goodyear’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 1.2%, meaning it lit $1.21 of cash on fire for every $100 in revenue.

Taking a step back, we can see that Goodyear’s margin dropped by 5.2 percentage points during that time. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business.

Goodyear burned through $181 million of cash in Q3, equivalent to a negative 3.9% margin. The company’s cash burn slowed from $351 million of lost cash in the same quarter last year.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Goodyear historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.9%, lower than the typical cost of capital (how much it costs to raise money) for industrials companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Goodyear’s ROIC averaged 4.2 percentage point decreases over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Goodyear reported $810 million of cash and $8.06 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.79 billion of EBITDA over the last 12 months, we view Goodyear’s 4.0× net-debt-to-EBITDA ratio as safe. We also see its $432 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Goodyear beat analysts’ EPS expectations this quarter. We were also glad its EBITDA outperformed Wall Street’s estimates. On the other hand, its adjusted operating income missed and its revenue fell slightly short of Wall Street’s estimates. Overall, this print was mixed but still had some key positives. Investors were likely hoping for more, and shares traded down 2.2% to $8.76 immediately after reporting.

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

We see the value of companies helping their customers, but in the case of Goodyear, we’re out. Although its revenue growth was decent over the last five years, it’s expected to deteriorate over the next 12 months and its relatively low ROIC suggests management has struggled to find compelling investment opportunities. And while the company’s projected EPS for the next year implies the company’s fundamentals will improve, the downside is its cash profitability fell over the last five years.

Goodyear’s P/E ratio based on the next 12 months is 7.4x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $9.51 on the company (compared to the current share price of $8.76).