Are the wagons or vultures circling at Goodyear? Analysing Elliott Investment Management’s case for change

Elliott Investment Management L.P.’s 11 May open letter to Goodyear’s board of directors sent shockwaves through the company and the markets. Essentially, Elliott’s expounded on its “deep conviction in the opportunity for Goodyear to improve after more than a decade of underperformance”, which was widely interpreted as laying down the gauntlet to Goodyear’s board and most senior executives. With Elliott calling pistols at dawn in the mid-west, the question is: is it time to buckle up and circle the wagons in Akron or are vultures circling over Goodyear? Here, Tyres & Accessories presents an in-depth analysis of Elliott’s arguments for enormous change, critically evaluating the problematic areas Elliott identifies along the way. In order to support our analysis, we spoke to senior executives close to Goodyear, those with first-hand management experience in Akron, financial analysts and third-party market researchers.

But first, the context. Initial headlines associated with Elliott’s letter focused on the fact that the company is calling for wholesale changes within Goodyear’s top management. But not only is Elliott calling for five changes to the board, the 10 per cent shareholder in Goodyear set up a website (acceleratinggt.com) detailing plans to overhaul the business, drafted a press release which was sent to anyone who will listen, and published a 41-page presentation in order to outline their complaints.

Shares jumped 18 per cent in response to the news, before rising to five-day highs of around $14.91. At the time of going to press in time for our June edition, Goodyear’s stock price had fallen back about a dollar, but those levels are still up a massive 37 per cent year-to-date.

While the open letter to the board and the accompanying website could understandably be interpreted as the prelude to some kind of takeover by the significant shareholder, Elliott’s letter states ”the purpose of the materials is to outline the right path forward to create value at Goodyear and realize its full potential.”

Elliott’s complaint centres on its assessment that Goodyear has been underperforming for a long time: “Despite the company’s strong brand, leading market share and favourable industry tailwinds, Goodyear’s stock has meaningfully and consistently underperformed. The company’s poor stock performance is a direct result of its significant margin erosion, suboptimal go-to-market strategy, and unfocused brand strategy, which have collectively led to a loss of investor confidence,” according to the letter.

On the subject of releasing value “trapped” in Goodyear’s retail platform, Elliott wrote: “Explore ways to monetize Goodyear’s Company-owned store network, which Elliott believes is nearly worth Goodyear’s market capitalization given the multiples of auto aftermarket service businesses.”

Along the way, Elliott presumably sought to reassure employees of its intentions, with suggestions that its plan does not foresee “any reductions in plant capacity or factory workforce.”

Elliott believes these steps will unlock “more than $21 per share in value for shareholders, an increase of 179% to its current share price.”

Goodyear: “Reviewing Elliott’s recommendations”

In response, executives at Goodyear’s Akron, Ohio headquarters released a statement confirming that they are “reviewing Elliott’s recommendations” and “intend to meet with them to discuss their views in more detail.” As of 26 May, Goodyear representatives appear to have got together with Elliott for the meeting promised two weeks earlier. A month later, official sources couldn’t confirm that those meetings have taken place. Further sources in addition to those referred to in the May reference report they have.

Whatever stage discussions have reached, how plausible are Elliott’s plans? And how robust are the investment firm’s various conclusions of underperformance?

$101 million net loss in Q1 2023

All of the above comes in light of Goodyear’s repeatedly disappointing financial results. Indeed, Goodyear’s recent first-quarter 2023 investor letter was published shortly before Elliott’s letter.

Despite a first-quarter 2023 net loss of $101 million, down $197 million compared with $96 million of positive income 12 months ago, Goodyear executives tried to shine a positive light on the US-based tyremaker’s latest financial results. Volumes may have been 3.2 million units lower than the same period last year at 41.8 million units, but net sales grew 1 per cent compared with the first quarter of 2022 and 4 per cent excluding foreign currency effects. And Goodyear EMEA is back to breakeven. But that wasn’t enough to avoid talk of accelerated cost-cutting measures.

As well as pointing to the ongoing war in Ukraine, channel destocking was given as the primary reason for the lower sales volumes at the heart of the negative figures. The fact that revenue per tyre (excluding currency impact) was up 12 per cent versus the first quarter of 2022 was presented as another silver lining in the fiscal cloud. Meanwhile, the replacement industry in EMEA was said to have been particularly impacted by “the Russia/Ukraine conflict”, something that has brought with it “higher energy costs for consumers” and, one might add, manufacturers too.

Nevertheless, with announced price increases in January, Goodyear EMEA returned to breakeven profitability during the quarter. Furthermore, the region has also continued to record market share gains, with “strong growth in consumer and commercial OE”. Indeed, executives “expect EMEA’s segment operating income to improve and for the region to move toward recent levels of historical segment operating income by mid-year.”

Accelerated cost-cutting measures

But none of that is putting the brakes on Goodyear’s European cost-cutting measures, with “structural shifts in the macroeconomic and industry outlook in Europe” leading executives to “accelerate actions to reduce our cost structure in order to improve our margins over the long term”.

Following on from Goodyear’s fourth quarter investor letter, when executives announced a review of the company’s “European cost structure”, including “business transformation initiatives” and “manufacturing cost” changes, Goodyear executives have set a further goal to reduce “consumer manufacturing cost by ~$3.00 per tyre over the next five years.”

In order to achieve that, Goodyear says it will find savings of $75 to $100 million a year via “simplification and standardization…through leveraging our global business services organization, beginning in mid-2024.” Which sounds like the centralisation of some sales, marketing and administration functions including a reduction in total headcount.

At the same time, executives are also conducting a review of Goodyear’s EMEA manufacturing footprint “given lower industry demand, diminishing profit pools in the lower tier segments”. That explicitly includes “a comprehensive approach to reducing our high-cost capacity and modernizing our footprint in EMEA”. Which sounds like a reduction in European production capacity and its associated jobs.

Executives expect, to some extent, to “self-fund the planned restructuring” by “reviewing our portfolio of brands”, which sounds like a simplification of Goodyear’s complex and well-stocked brand basket. But at least we know that executives have only just stated that current brand reviews won’t feature the transition of Avon to the role of a two-wheel brand.

And finally, in addition to the aforementioned manufacturing review, Goodyear is linking certain “manufacturing assets” and “recently shuttered real estate” with the self-funded restructuring efforts. In other words, Goodyear appears to be planning to sell off some equipment and land. On the latter point, the land upon which Goodyear’s recently shuttered Cooper plant in Melksham is built is most likely to be amongst those sold.

If it wasn’t already obvious, “the scope of this review is significant” and “these actions would be in addition to previously announced restructuring actions”, which will no-doubt have Goodyear EMEA employees raising questions about their own positions. Nevertheless, executives affirmed that they “remain committed to a profitable, value-generating business in EMEA”. In other words, Goodyear’s senior leadership was letting investors and stakeholders know that times might be tough, but there are a number of plans underway to address those challenges.

However, none of that was enough to placate Elliott Investment management, which – of course – answered Goodyear’s investor letter with a letter of its own.

An olive branch to staff? Good news for factory workers, less so for back-office staff

While Goodyear executives’ latest financial results include plans for a brand review and additional cost-cutting measures, Elliott’s way forward apparently doesn’t include further job cuts. One interpretation of that move is that, having caught the attention of investors judging the overwhelming positive share price reaction to Elliott’s letter, Elliott was next aiming to win over those inside the business.

That being the case, the significance of offering some kind of internal olive branch to Goodyear employees is underlined by the fact that Elliott “…engaged in more than 90 conversations with former Goodyear and industry executives to help us analyze the Company’s competitive positioning and opportunities…”. Remember, according to the Akron Beacon Journal, around 90 jobs have been cut from Goodyear’s Akron headquarters in recent months. Therefore, it is entirely possible that some of those Elliott spoke to are very recent ex-insiders. To put it another way, some of what we read in Elliott’s letter could well represent voices from inside Goodyear HQ re-worded.

So what is Elliott saying when it comes to jobs? “For the avoidance of doubt, we are not calling for any reductions in plant capacity or factory workforce”, Elliott Investment Management wrote in the 11 May 2023 letter.

Neither is Elliott calling for any increases in leverage: “On the contrary, the changes we are seeking at Goodyear would reduce leverage, accelerate growth and lay the groundwork for a more sustainable future.” Both points certainly sound positive to staff who have been facing 500 or more job cuts and obviously have an interest in the ongoing financial security and success of the business.

However, those initially comforting-sounding words written “for the avoidance of doubt” leave room for interpretation. Specifically, they are more comforting for members of the 74,000-strong Goodyear Tire & Rubber Company team engaged in production at the company’s 57 factories, than for office-based employees.

That’s because, towards the back of the presentation that accompanied its letter, Elliott states that reducing selling, general and administrative expenses (SG&A) to bring these “in line with peers” would result in a “43 per cent upside to Goodyear’s stock price.” Goodyear’s SG&A amounted to US$2,798 million in 2022 (up 3.7% year-on-year), with a margin of 13.4 per cent.

After comparing “Goodyear’s underperformance” with efforts made by Bridgestone to reduce SG&A since 2016, Elliott sees an opportunity to reduce Goodyear’s SG&A margin by approximately 114 basis points (1.14 per cent). When comparing Goodyear with Michelin, the shareholder sees a potential SG&A reduction margin opportunity of around 240 basis points.

Measures to reduce SG&A margin include eliminating “non-core” and “extraneous business lines” such as Goodyear Ventures and merchandising websites, as well as reviewing management incentives and fostering a “culture based on performance.” Elliott also mentions a third means of reducing SG&A margins: By “streamlining” Goodyear’s “back office.”

Elliott explains that it anticipates potential G&A savings of more than 100 basis points by “reducing back-office functions” at Goodyear to bring these “in line with industrial manufacturing peers.” Elliott names IT, finance/accounting, human resources, legal and administration as departments where cuts could be made.

It is also worth pointing out that some non-back-office jobs are already being cut. At the end of April, at the same time as confirming that it is opening two new distribution centres in Cheb, Czech Republic and Amiens, France, Goodyear announced that it is closing its Philippsburg, Germany operation. That in itself is not completely new. Goodyear announced that it was closing its Philippsburg, Germany tyre factory in 2016 and production ceased in 2017.

Since then, it has been run as a tyre distribution centre in conjunction with third-party logistics firm – Geis Tyre Warehousing GmbH. Tyres & Accessories understands that the Philipsburg tyre distribution operation is no longer as efficient and effective as Goodyear had hoped, resulting in consultations on the future of 15 out of 37 Goodyear jobs in Philippsburg.

However, the ripple effect runs wider. According to an article published by our German sister title Neue Reifenzeitung (NRZ), the number of job losses coming through the closure of Goodyear’s warehouse in Philippsburg may be significantly more than the 15 positions mentioned at the time. Geis Tyre Warehousing, which also operates other warehouses for Goodyear in Germany and Luxembourg, has run the Philippsburg operation since 1 January 2020. Geis Tyre Warehousing told NRZ that it – at the time of going to press – employed almost 300 people in Philippsburg. And they are not optimistic about their futures with Geis.

Elliott clearly wants to portray itself as the future of Goodyear, but personnel-related wording found in Elliott’s “accelerating Goodyear” letter can’t instil any confidence in back-office staff and doesn’t address the issue relating to indirectly employed workers. And since when did private equity investors – who by definition seek to find value in businesses they buy – not identify personnel synergies, in other words, job cuts?

How feasible are Elliott’s retail plans?

Goodyear currently owns around 1,025 “auto service retail stores”. On the one hand, US national scale and geographical coverage are strong points, but Elliott reports that the company “has failed to leverage its industry-leading consumer brand into growing a high-value retail platform”, adding: “Over the past five years, the number of Goodyear Auto Service stores has contracted, whereas public peers have grown their footprints substantially.”

So how is Elliott planning to improve the state of Goodyear? Having outlined the problems, Elliott suggests Goodyear should sell its 1,025-branch strong retail network, arguing: “…a sale of these stores would generate an increase of more than $4 per share in the company’s stock price, while allowing the retail platform to grow under more focused and better-capitalized ownership.” That’s quite a claim, but how feasible is that plan?

Realising the value of assets is a common method of helping a business improve its balance sheet. Indeed, it is a stalwart in the private equity playbook that has been played out before inside and outside the tyre industry. Buy a retail business that owns its property, sell off the real estate to a third party that may or may not be related to the shareholders and then lease back to the original business. However, what is straightforward on paper is not always so easy in practice.

First off, you need a buyer. Speaking to industry sources across the Atlantic, the consensus was that there are buyers out there – mainly to be found amongst the existing, private-equity-backed tyre retail competitors. That’s the first red flag. There are buyers out there, but – if manufacturer-controlled distribution was the goal of owning retail equities – it is a strategically bad move because selling up immediately puts another link in the distribution chain, bringing inherent cost and complexity issues along with it. In short, selling up might raise some capital, but it is an unavoidably one-off move that could result in selling market share to the opposition.

Somewhat coincidentally, at the end of May, the buyer pool just got smaller. TBC Corporation agreed to sell its company-owned retail portfolio to Mavis Tire Express Services Corp. Specifically, Mavis will acquire 392 NTB Tire and Service Centers (NTB) and 203 Tire Kingdom Service Centers (Tire Kingdom). In connection with the deal, Mavis and TBC have entered into a distribution agreement, through which TBC will provide wholesale and tyre distribution for Mavis retail locations. In other words, TBC has sold its retail shops and – at the same time – aimed to secure sales. The difference between TBC making such a deal and Goodyear is that TBC can do so in a far more brand-agnostic manner, something that is more attractive to B2B tyre retail customers in mature markets such as North America and Europe.

Secondly, if Goodyear does find a buyer, who will buy all 1,025 branches? What is to stop a buyer from approaching the business and cherry-picking the best branches for their own strategic purposes. That might result in a fair proportion of the targeted one-off income being realized, but it would also mean that the vendor – in this case Goodyear – would be left holding the weakest retail locations in its portfolio. And the questions about market share and distribution remain unanswered. Seen that way, letting a buyer cherry-pick just results in unsatisfactory one-time income, reduced market share and selling the best branches to the opposition.

It is also worth noting that TBC is not selling off its Midas and Big O Tires retail franchises, which total around 2,500 locations between them.

Elliott’s argument for selling off Goodyear’s retail business is that “Well-capitalized and efficiently operated automotive aftermarket service businesses trade in both the public and private markets at valuations dramatically higher than where Goodyear trades today”.

But it is also worth pointing out that the experience of virtually every equity-owned tyre retail operation in the UK and Europe has been somewhat cyclic. In the first phase, manufacturers seek to control distribution through ownership. Then others follow. At a certain point, equity ownership reaches critical mass and – for not unconnected reasons – profitability (or lack thereof) becomes unsustainable and the businesses are sold off to private equity or other third parties until the next round of acquisition.

The more common approach since the last round of largescale equity ownership on this side of the pond has been to engage with distribution ownership via various flavours of franchising, sometimes combined with an equity ownership dimension. And those franchise models that manage to fuse dealer benefits for brand loyalty with cross-market product availability tend to be most successful. In other words, those offering a more brand agnostic approach.

So, are Elliott’s retail plans feasible? They work better on paper than they are likely to in practice. They bring with them strategic problems relating to market share. If it is possible to find a buyer, the risk of cherry-picking is high. And, as the most recent headlines testify, the window of opportunity for finding a buyer is closing. In other words, Elliott’s tyre retail claims should be viewed with a fair degree of cynicism.

TireHub: “A suboptimal go-to-market strategy”?

One of the most critical parts of Elliott’s case relates to Goodyear’s North American distribution operations, which Elliott calls Goodyear’s “suboptimal go-to-market strategy”. In short, Elliott calls for the overhauling of the effort Goodyear has put into TireHub.

For those not familiar with Goodyear’s Northern American tyre distribution operations, for decades, Goodyear primarily distributed its tyres through local distributors who, in turn, had their own relationships with tyre retailers. Over the years, just as in Europe, the number of tyre sizes and fitments proliferated. In response, distributors consolidated to cope with the complexity and leverage their economies of scale.

Elliott singles out American Tire Distributors’s (ATD) progress to becoming “the largest [US] national tyre distributor”, calling it an “effective roll-up strategy”. One key reason for that success was because ATD operated with “a more brand-agnostic approach”, a strategic difference we already saw earlier in this text in relation to competing tyre wholesaler TBC.

As ATD grew, both Michelin/Sumitomo and Goodyear/Bridgestone formed wholesale distribution joint-ventures to “better control distribution” resulting in TBC and TireHub respectively. The problems, according to Elliott, were that “Goodyear took a significantly more hostile approach than its peers” and that “while Michelin emphasized the importance of growing together with its distribution partners, Goodyear hastily redirected the entirety of its ATD volume to TireHub”.

In April 2018, Goodyear stopped supplying tyres to ATD and “tried to push those units through the newly formed TireHub.” Meanwhile, ATD quickly replaced all lost Goodyear volume with competitors’ brands, according to Elliott’s research.

The problem is that “TireHub faced significant challenges” along the way, according to Elliott. Among these, lack of scale, technical issues and – once again – the brand strategy are arguably the foremost.

On the subject of scale, one need only compare TireHub’s 79 distribution centres at the end of 2022 (at which point the company highlighted that “more” were coming in 2023). ATD, on the other hand, has over 140 and TBC’s National Tire Wholesale business over 110.

TireHub had reportedly encountered problems with its Enterprise Resource Planning (ERP) software and systems. According to Elliott, these “affected payments and rebates with its retailers, causing additional friction in the transition”. Those negatives are arguably compounded by the relative strengths of competitors in the same technological area. However, TireHub’s systems have clearly been upgraded in recent months with the addition of integrations with various garage-customer-orientated software platforms – namely R.O. Writer in December 2022 and AutoLeap in May 2023. In both cases, the integrations facilitate advanced functionality such as viewing inventory by location and relevant delivery charges, which should help to alleviate any technology-related objections.

And finally, we’re back to brands again. Elliott describes TireHub’s brand offering as a “poor value proposition” since it “sells only Goodyear and Bridgestone brands (with a small Toyo business)”. However, in TireHub’s defence, its brand portfolio has naturally broadened since Goodyear’s Cooper acquisition. Specifically, that means TireHub’s attainment of National Distributor status for the Cooper Medallion Program in October 2022. More recently, TireHub became an official national distributor of the Mickey Thompson brand, which is best-known in Europe for its off-road orientated 4×4 tyres, on 1 May 2023.

As far as solutions are concerned, Goodyear should “…review TireHub’s performance and its potential to decide whether Goodyear should pursue a new relationship with a large national distributor or a combination of TireHub with a strategic distribution partner”, according to Elliott. In other words, Goodyear should pull a strategic u-turn and go cap-in-hand back to ATD. Now that Goodyear has the Cooper brand stable in its wheelhouse, one way of doing that could be to re-open the Goodyear group door by developing ATD’s position with the former Cooper group brands Goodyear now owns. Some industry sources have even suggested that the Cooper acquisition took place – at least partly – for this reason. But it is also worth noting that Elliott repeatedly and exclusively refers to ATD as a point of comparison and apparently the only suggested solution.

Unlike Elliott’s retail proposals, the investor’s harsh criticism of Goodyear’s go-to-market strategy can be supported with evidence that stretches beyond the theoretical, especially when it comes to infrastructure scale and technology-related points. On the subject of brand strategy, the questions remain manifold. However, TireHub has repeatedly stated that it is in the midst of ongoing expansion plans and there is also tangible evidence of technological developments on the ERP side of things. Meanwhile, it remains to be seen whether or not Elliott’s suggestion that Goodyear should “pursue a new relationship with a large national distributor or a combination…” was actually news to the tyremaker. Goodyear’s decision to retain ATD’s Cooper distribution and extend TireHub’s range to include Mickey Thompson rather suggests otherwise.

However, any strategy based on funnelling Goodyear and Goodyear group brands including Cooper-related brands volume through TireHub has its limits. The comparably small volumes of Mickey Thompson are one thing. But, considering that Bridgestone and Toyo are being distributed through a system that is demonstrably 20-odd per cent smaller in terms of distribution centre count than the other two market leaders as well, Goodyear needs distribution from somewhere.

Branding: too many cooks in the kitchen?

The acquisition of Cooper may address some of Goodyear’s US distribution- and brand-related problems, but more brands can also mean more problems. As we have seen throughout this analysis, there are many levels to the branding question, but arguably the most significant questions are how branding relates to segmentation and ultimately pricing.

Goodyear already had a complex brand portfolio prior to the Cooper acquisition, comprising of numerous brands including: Goodyear, Dunlop, Fulda, Sava, Debica and Kelly. Goodyear had spent years arguing in favour of a dual-premium brand strategy, something the company has visibly walked away from more recently in everything from the legal names of local branch companies to motorsport.

With all that in mind, it is no surprise that Goodyear’s recent Cooper integration presentation, which was published in parallel with the company’s first quarter 2023 results (see textbox), gave a significant amount of space to questions relating to the combined business’s brand portfolio. Of course, the Goodyear presentation referred to the newly expanded brand portfolio in glowing terms, suggesting that it “enables an unmatched product offering across the value spectrum.”

Executives also trumpeted how, in November 2022, the company “broadened Goodyear and Cooper product availability through Goodyear aligned distributors”. And in January 2023, “broadened Goodyear and Cooper product availability through Goodyear aligned distributors”.

The problem is that the last two quarters of markedly reduced Goodyear group tyre volume sales do not suggest that having such a big brand portfolio is a secret weapon or a silver bullet. Rather, Goodyear’s financial statement spoke of the need to review the wider company’s brand portfolio. Again, this was published more than a week before Elliott critiqued Goodyear’s brand strategy.

Judging by the brand graphic accompanying Goodyear’s Cooper update, some of that evaluation has already been done (see illustration). Here, the brand ordering suggests that Goodyear and Cooper are being promoted at a similar level within the Goodyear group brand hierarchy, with Dunlop relegated to the second-tier level of Kelly and Mastercraft. In a similarly surprising move, Fulda is down on the third tier alongside Debica, Sava and Starfire. Avon is absent.

It could be a coincidence, but the diagram certainly isn’t in alphabetical order and – as you would expect – Goodyear is always listed first. If the diagram does indicate group brand priorities moving forward, the future of Dunlop and Fulda in the post-evaluation brand portfolio isn’t as positive as it might once have been. Recent official statements released by Goodyear EMEA were emphatic about the ongoing longevity of the Avon brand and that it isn’t being turned into a two-wheel-only brand. However, the absence of Avon in this diagram raises many questions.

Tyres & Accessories asked Goodyear EMEA why the brand diagram was listed in the manner it was and why Avon is missing. In response, a spokesperson told us that there wasn’t any particular reason for Avon’s omission and that the graphic was presented as it was for “aesthetic reasons”.

Pricing: The key to brand differentiation

Whatever brands Goodyear keeps moving forward, and its total brand offering aside, Elliott’s key criticism relates to apparent “limited brand differentiation” and that centres on Goodyear’s pricing strategy.

In order to illustrate that point, Elliott sampled eight 235/60 R18 tyres in the Goodyear brand portfolio and compared their prices with eight Bridgestone and Michelin produced tyres of the same size. Pricing data was derived from well-known US tyre e-tailer TireRack.com at the end of April. The short story is that the eight Goodyear-produced tyres all landed within a $45 price spectrum. Bridgestone and Michelin’s tyres, however, covered roughly $130 and $100 range respectively. On a related point, Elliott argues that Goodyear’s pricing is too low and “generates about one-third the revenue per brand of Michelin and Bridgestone”.

However, Elliott’s research only relates to the US market and is entirely reliant on one retailer’s pricing data on a single day. The fact that the retailer operates in the online space where prices move all the time only accentuates the need for better data to support Elliott’s conclusion.

Anecdotally, we have heard similar things about Goodyear being the cheapest premium brand over a period of years. But, not wanting to repeat the weaknesses of Elliott’s approach, we got in touch with the analysts at Encircle Marketing, which constantly tracks pricing at small, medium and large retailers both online and at bricks and mortar locations across the UK and beyond.

Of course, all data should be set within its context. In the case of the Encircle Marketing data, that’s 12 months of whole market coverage, breaking down pricing by brand, size and both online and conventional retail channel. What it reveals is that between April 2022 and April 2023, Goodyear wasn’t the cheapest premium brand out there. It was the second cheapest, occasionally trading places with Bridgestone and Continental at odd points during the year. However, while Goodyear prices followed the overall market trend towards increases, rising from around £100 to £130 during the period, Goodyear retained its relative position towards the bottom. By way of comparison, the top two premium brands (Michelin and Pirelli) were consistently able to achieve between 10 and 20 per cent more per tyre on average respectively (see chart “Weighted averages using average prices in United Kingdom”).

So, if Goodyear isn’t the cheapest premium brand, which is? That esteemed position belongs to Dunlop which clearly floated under Goodyear – and therefore all the other premium brands – all year long. With two Goodyear group brands bringing up the rear in terms of premium-brand sell-out pricing, it is possible that Elliott’s thesis that there isn’t much price differentiation across the Goodyear group brand portfolio is correct.

When the same data is broken down by Goodyear group brands, some surprising trends are noticeable. First off, Dunlop starts the year as the most expensive Goodyear group brand, but by the end of the period, Goodyear is in pole position, with little differentiation between the top two.

Even more surprisingly, between September and October 2022, Fulda and Sava led the way in terms of price point. Cooper is consistently priced in the middle of the narrow range, while Avon is clearly adrift from the rest of the group – up to £17 pounds per tyre adrift from next-placed Debica at certain points in the year.

Elliott’s research pointed to a $45 dollar range between the top and the bottom of the brand basket. And when you look at our data for the month of April 2022, for example, that’s exactly the kind of thing we can see in the UK. However, by June 2022, there is less than £16 between the top and the bottom of the brand basket. In other words, the third-party market data based on UK sell-out prices suggests Elliott’s conclusions are either correct or the situation is actually worse than they suggest. The data also suggests the Goodyear group brand-price positioning fluctuates significantly throughout the year to an almost chaotic degree.

“143 per cent underperformance” and investor confidence

When it comes to shareholder returns, Elliott believes Goodyear has “underperformed by 90 per cent over the past five years and 143 per cent over the past ten years” relative to the S&P 400. And “relative to proxy peers, key competitors and relevant indices such as the Dow Auto Parts Index, the story of underperformance is similar”.

To that end, Elliott produced a 10-year chart illustrating Goodyear’s cumulative total return relative to peers and even Michelin and Bridgestone specifically. That latter point is comparable with the five-year data we compiled in February, which showed that Japanese tyremakers are significantly outperforming Western tyre brands in terms of financial outcomes and that Michelin is top of the tree amongst western brands.

The reason for Goodyear’s underperformance? Elliot argues that low prices lead to low margins, which combined with the aforementioned “suboptimal go-to-market strategy” and “unfocused brand strategy” have led to “a loss of investor confidence.”

Not only is that bad for Goodyear’s long-term share price, “The company now finds itself capital-constrained and unable to pursue value-creating opportunities, such as high-ROIC investments to support growing its valuable retail store platform.”

So, let’s take a closer look at Elliott’s claims in relation to investor confidence. First off, investors have very real concerns about Goodyear’s already high levels of indebtedness.

As Tyres & Accessories noted in our special supplement analysing the Cooper acquisition a couple of years back, that highly leveraged buyout continued a theme of the company’s leadership: Goodyear is generally more indebted than its global tyre manufacturer rivals. Of course, debts are a fact of life for such large companies, especially those that make the decision to pursue costly acquisitions. But the current environment of higher interest rates and falling margins increases the risk that these debts will become more of a burden, dragging down the company’s profitability further.

At the end of the first quarter, Goodyear had added more than half a billion dollars to its total debt, increasing the figure to $9.0 billion, while net debt was $7.9 billion. The company explained that this was the result of increasing inventory, with 2.0 million extra units versus the same point in 2022.

We can contrast this with rival Michelin’s debt position as of the last available figures at the end of 2022. The global number one tyre manufacturer had reduced its total debt by around half a billion euros versus the previous year, to 6.53 billion euros ($7.07 billion). But with 2.87 billion euros ($3.10 billion) in cash, Michelin’s net debt was 3.66 billion euros ($3.95 billion), or around half that of Goodyear’s.

Ratings agencies have mixed views on Goodyear’s debt position. For example, Fitch currently remains unconcerned by the rise in debt, maintaining its BB- rating of Goodyear stock on the basis that such trends as increasing rim sizes and rising demand for electric vehicle tyres, as well as synergies with Cooper, will play into the tyre maker’s hands. S&P Global meanwhile maintained its own BB- rating for Goodyear stock but downgraded its recovery outlook to negative. Michelin’s A- rating from Fitch was affirmed in March 2023 with the agency explaining that “Michelin’s ability to retain its solid operating margins despite inflationary pressures by rapidly increasing prices and improving its product mix in 2022” showed stability, while also acknowledging similar helpful industry trends to Goodyear. S&P Global also maintains Michelin’s rating at A-.

Maintaining its ability to handle a higher level of debt than its rivals can be seen as an encumbrance to Goodyear. Criticisms of the board on the basis of a higher level of debt than rivals hold a certain amount of water, especially when cashflow is similarly lower.

Secondly, there are broader points relating to investor relations. Elliott highlights that “Goodyear has…missed investor day targets set in 2016 by nearly 70 per cent and has consistently lowered and pushed out margin improvement promises. At the same time, Goodyear has increased invested capital by $4 billion since 2016, only for Net Operating Profit After Tax (NOPAT) to decline by 42 per cent (while peers’ NOPAT has grown).” The result, they say, is that market sentiment relating to Goodyear is “profoundly negative” and that the market has “orphaned” the stock.

Elliott points out that Goodyear shares are covered by just seven sell-side analysts compared with 18 to 20 at peers like Continental, Pirelli and Michelin. But why? “…this company ‘hasn’t missed an opportunity to miss an opportunity’…”, is the particularly dramatic answer given by one Wolfe Research analyst.

We got the inside view of another analyst with years of experience at multiple global banks focusing on automotive share analysis. They spoke on condition of anonymity on the basis that they, like many others, are not currently covering Goodyear: “…Interest among US investors is low. It is sensible [that] stock brokers allocate resources where there is demand.”

Continuing, the analyst supported Elliott’s suggestions that Goodyear is trailing its peers: “I always thought Goodyear lagged Michelin and Bridgestone – which were already late versus the rise of exports…in the last 20 years and made the worst strategic investments.”

But while enthusiasm for Goodyear’s performance wasn’t high, Elliott’s reputation was esteemed: “Elliott has a good track record and it is very determined. I don’t know exactly what they want to do and if it will help Goodyear to be honest. I think first stock price reaction is just because of trust in Elliott”.

Goodyear stock shot up ~30 per cent following Elliott’s letter to the board. Two weeks later the figure had backed off a bit but was still trading in a similar region. Those levels equate to a year-to-date increase of around 44 per cent and are nearing the one-year high of $15.19. In other words, investors had confidence in change where they didn’t have confidence in maintaining the status quo. Elliott’s suggestions that Goodyear stock is being orphaned are clearly hyperbolic. Seven analysts is some way behind the other premiums, but is far from zero. However, concerns about price, margins and debt – not to mention the reliability of forecasts and targets – clearly weigh heavy on the minds of some of the leading stock analysts.

The need for a brand overhaul is the single point of consensus

In conclusion, Elliott wants Goodyear to sell off its retail, rationalise its brand strategy and overhaul TireHub with a view to improving profitability and winning back investor confidence. It looks nice on paper, but selling off the retail business won’t be so easy in practice and brings with it significant strategic risk. On the subject of TireHub, Elliott makes convincing points. However, Goodyear’s official documents show that the company is already aware that work needs to be done at TireHub and the pressing need to rationalise its brand strategy. On those points, it is easy to offer advice of how to accelerate Goodyear as a backseat driver, but much harder to execute.

However, when it comes to branding and pricing it seems that all sides agree that the current situation is neither coherent nor sustainable. Furthermore, as this analysis repeatedly shows, brand positioning is interconnected with several of the other key areas such as pricing, retail and distribution strategies. Whether third parties ultimately get thier regime-changing way or whether the current leadership weather the storm, real change will have to be affected in that area in order to avoid going around the brand portfolio mountain again and in order to avoid further financial pressures.