Goodyear Tire and Service location in Madison Heights, Michigan.
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Company: Goodyear Tire & Rubber (GT)
Business: Goodyear is one of the world’s leading tire manufacturers with operations in most regions of the world. The company designs, manufactures, distributes and sells tires for most applications. It also manufactures and sells rubber-related chemicals for various applications. Goodyear is one of the world’s largest operators of commercial truck service and tire cleaning centers.
Stock Value: $3.9B ($14.02 per share)
Activist: Elliott Associates
Ownership percentage: ~10.0%
Average price: no
Comment from the activist: Elliott is a very successful and smart activist investor, especially in the technology sector. Their team includes analysts, engineers, operating partners – former technology CEOs and COOs – from leading technology private equity firms. They also employ specialty and general management consultants, expert cost analysts, and industry experts when evaluating an investment. They often follow companies for many years before investing and have a broad stable of impressive board candidates.
What is happening?
On May 11, Elliott issued a letter and presentation to Goodyear’s board urging the company to appoint five new independent directors, monetize the company’s chain of stores, and create an operating review committee to develop a plan to improve operations and margins.
Behind the scenes
Goodyear is an iconic leading global tire manufacturer founded 125 years ago. It is a market leader in a business with stable growth, non-cyclical and strong pricing power, making it somewhat immune to inflation. The company sells tires to original equipment manufacturers (“OEM”) and the aftermarket, with 80% of its sales coming from the aftermarket. Moreover, there has been a recent trend among OEM customers towards more expensive vehicles, which Goodyear is upgrading from more commodity-type vehicles with more international competition to more luxury vehicles requiring higher-end tires – where Goodyear excels. Although the OEM market accounts for only 20% of the company’s business, this trend covers the other 80%, as people generally replace tires with the same brand.
However, despite these advantages, the stock has significantly underperformed its peers, underperforming the S&P 400 average by 90% over the past five years and 143% over the past decade. Much of this underperformance is the result of (i) margin erosion – despite leading scale, its margins are the lowest in the tire industry, trailing its closest peers Michelin and Bridgestone by nearly 700 basis points; (ii) underutilized retail platform – the company has approximately 1,025 top-rated auto service retail stores, but has failed to leverage its consumer brand to develop a high-value retail platform; and (iii) loss of investor confidence – over the past few years it has failed to meet financial targets and has consistently downgraded and delivered on margin improvement promises. As a result, the company is now constrained by capital and unable to pursue value-creating opportunities such as high ROIC investments to support the growth of its retail platform.
There are several opportunities for value creation here that Elliott believes could generate an additional $21 per share. Goodyear has the opportunity to monetize its company-owned store chain through the sale of approximately 715 stores, and the proceeds from those stores can be used to pay down debt, improve balance sheet and financial flexibility. Those stores generate less than 10% of the company’s revenue, and selling them could generate more than $4 per share, while allowing the retail platform to grow under more focused and better-capitalized ownership. Another opportunity for the company is to focus on the operational and margin improvement plan. A comprehensive review of Goodyear’s selling, general and administrative expenses could lead to a margin improvement of at least 114 basis points, while a redesign of their go-to-market and brand strategies could boost operating margin growth by 271 basis points and more than $16 per share. With peers Michelin and Bridgestone operating margins of 11.5% and 12.2% respectively, Goodyear has significant room for improvement with an operating margin of 4.8%.
In its letter, Elliott said it reached these conclusions “after an extensive research and due diligence process … conducted extensive due diligence with the assistance of senior counsel, legal counsel and investment bankers and conducted numerous interviews with former employees of the Company, fellow shareholders and industry executives. .” This is not an extra mile for Elliott, but standard operating procedure for the firm. Elliott has a team of analysts, consultants and industry executives with whom it works to identify investment opportunities and develop plans to create shareholder value. This is evident in its letter and detailed presentation. The firm does not offer a short-term fix of financial engineering and layoffs (in fact, Elliott specifically states that it is not in favor of more leverage and layoffs), but a long-term, well-thought-out and comprehensive management, operational, strategic and financial plan will not only solve the company’s problems, but also will also put it on a long-term trajectory to benefit shareholders for years to come. This is the type of letter and plan you want to see from activists, and what you often see from seasoned activists like Elliott.
To implement his plan, Elliott recommends adding five new directors to the board. Elliott hasn’t said it wants to replace the five current directors, but some attrition is needed to avoid having a board of 17 on 12 directors. There are certainly a few directors who are ready to move on. Six members of the 12-member board (including CEO Richard Kramer) have served on the board for more than 11 years. During this time, the company consistently underperformed with the same CEO retaining the titles of president and chairman at the same time. I am ideologically opposed to separating all CEO/chairman positions. For example, I have never had a problem with Warren Buffett being the chairman and CEO of Berkshire Hathaway. But when a company has performed this strongly over 13 years, the board should probably look for a new CEO, but at the very least, separate the roles of chairman and CEO. This, coupled with the poor performance and retention of many directors, makes a compelling case for serious board restructuring. It’s a great company with an iconic brand that just needs fresh eyes to revitalize the business, help management execute on the business plan, and hold them accountable when they fail. Elliott said it has identified five new independent director candidates it believes can help improve management, elevate the culture and restore investor confidence. The company has not disclosed the identity of these candidates to the public. Based on its history, we would expect this to be a diverse and qualified group of industry and professional directors with an Elliott head. Elliott is currently working amicably with management and recommending potential directors rather than threatening to appoint its own directors. This relationship will continue for some time as the 2024 director nomination deadline does not open until December 12th. We expect Elliott and company to reach an agreement before then.
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.