Goodyear has been treading water for the past six months, recording a small return of 1.7% while holding steady at $10.11. The stock also fell short of the S&P 500’s 8.4% gain during that period.
Is now the time to buy Goodyear, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Goodyear Will Underperform?
We're sitting this one out for now. Here are three reasons you should be careful with GT and a stock we'd rather own.
1. Demand Slips as Sales Volumes Slide
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Automobile Manufacturing company because there’s a ceiling to what customers will pay.
Goodyear’s units sold came in at -0.1 in the latest quarter, and they averaged 38.9% year-on-year declines over the last two years. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Goodyear might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Goodyear’s margin dropped by 5.2 percentage points over the last five years. 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’s free cash flow margin for the trailing 12 months was negative 1.9%.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative 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.
Final Judgment
We see the value of companies helping their customers, but in the case of Goodyear, we’re out. With its shares underperforming the market lately, the stock trades at 8.9× forward P/E (or $10.11 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d recommend looking at one of our top software and edge computing picks.
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