Saturday, October 28, 2017

Goodyear Tire’s 2017Q3 Volume, Debt Decline in China.

The Goodyear Tire & Rubber Company (NASDAQ:  GT) reported sales of US$3.9 billion in the three months ended September 30, 2017. Compared to the same period last year, sales grew 1.9%, but net income as a percent of sales declined from 8.3% in the third quarter of 2016 to 3.3% in the third quarter of 2017.

Globally, the company was not able to convert price inflation into sales revenue. According to the U.S. Bureau of Labor Statistics (BLS), the import price of rubber products increased 3.2% over the year ended September, 2017, but the company was only able to increase sales 1.9%. The company was able to limit the impact of commodity price inflation. According to the World Bank (WB), the price of rubber increased 18.1% over the year ended September, 2017, but the company’s cost of goods sold only increased 12.2%.

Within China, the company did not benefit from China accounting for half of world vehicle sales growth in the three months ended September 30, 2017. Unit Sales in the Asia Pacific region decreased 1.5% over the same period in the prior year. The Goodyear Tire & Rubber Company disclosed that original equipment tire volume declined 2.9% in the first nine months ended September 30, 2017 compared to the prior year, primarily driven by its consumer business in China.

Despite significant credit growth in China, the company decreased both its unused available funds and amount outstanding in its China credit facility. The amount outstanding declined from US$315 million on December 31, 2016 to US$247 million on September 30, 2017. The interest rate on the amount outstanding increased from 4.68% at the end of 2016 to 4.81% at the end of the third quarter of 2017. This is most likely the result of extending repayment terms further out. The unused available amount decreased from US$252 million at the end of last year to US$218 million as of September 30, 2017. This would indicate that the company is not looking to use the artificial credit created in the Chinese banking system to expand capacity.

The company is positioned in an industry with rising finished good prices, but input prices are rising even faster. The Goodyear Tire & Rubber Company has a cost advantage over its competitors because of its size. Considering that it is not further expanding capital expenditures to covert variable costs into fixed costs, it is likely to benefit disproportionately when the credit cycle busts and commodity prices drop much faster than finished good prices.