Goodyear Tire shares suffer worst day since Black Monday after disappointing FCF outlook

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Shares of Goodyear Tire & Rubber Co. took a sharp U-turn to sink deep into negative territory on Friday, after the tiremaker followed up a strong earnings report with a disappointing outlook for free cash flow for the entire year. anus.

The action initially jumped into pre-market trading after company
GT,
-27.44%

reported a fourth-quarter profit that far exceeded expectations. It peaked with a gain of up to 7.5% about 10 minutes before the open bell, then crashed.

Chief Financial Officer Darren Wells said about 28 minutes after the post-earnings conference call with analysts that it was scheduled to start at 9 a.m. ET that the company was “targeting free cash flow by 2022 around breakeven.” That compares to 2021 cash flow from operating activities of $1.06 billion.

Wells said the FCF guidance takes into account increases in raw material costs and inflation in wages, benefits, transportation and energy costs, “at levels beyond what we could efficiently offset,” according to a FactSet transcript.

The stock plunged 27.4% in very active afternoon trading to a five-month low. That marked the biggest one-day percentage drop since a record 28.6% drop on Oct. 19, 1987, a day known as “Black Monday” because of the Dow Jones Industrial Average.
DJIA,
-1.43%

record a drop of 22.6% that day.

Trading volume soared to more than 56.7 million shares, or nearly 10 times the full-day average over the past 30 days, according to FactSet.

Dataset, MarketWatch


When asked by Deutsche Bank analyst Emmanuel Rosner about “lower-than-expected” FCF guidance, the stock was down about 11%. CFO Wells responded by saying the outlook started with the fact that the company was able to deliver a stronger-than-expected balance sheet in 2021, but that didn’t support the stock much.

When the acquisition of Cooper Tire & Rubber Co. was announced in February 2021Wells noted that it was expected to be two years before net debt leverage returned to pre-deal levels, but the company achieved that goal by the end of 2021, a year early.

“And the fact that we had our balance sheet in better shape before, I think it made us feel like it was appropriate to be a little bit more aggressive with investing,” Wells said.

He said, in particular, that the investments are to make sure factories have the capacity to support the tires that Goodyear will design and build for electric vehicle platforms, “which has been an increasing part of our [original equipment] fit wins.”

The reasoning for FCF’s break-even outlook did not seem to matter to investors as the sell-off in shares continued.

Meanwhile, for the fourth quarter, net income increased to $553 million, or $1.93 per share, from $63 million, or 27 cents per share, in the same period a year ago. Excluding non-recurring items such as a $379 million tax benefit, adjusted earnings per share rose to 57 cents from 44 cents, beating the FactSet consensus of 32 cents.

Sales grew 38.2% to $5.05 billion, boosted by the acquisition of Cooper Tire, to exceed the FactSet consensus of $5.01 billion.

Cost of sales increased 42.1% to $3.97 billion, effectively reducing gross margin to 21.5% from 23.6%.

“We achieved our highest fourth-quarter revenue in nearly 10 years as demand for our products remained strong and we captured higher selling prices,” said CEO Richard Kramer. “Looking ahead, we expect inflationary pressures to persist in the coming quarters.”

Goodyear shares have plunged 33.0% in the last three months, while the S&P 500 index
SPX,
-1.90%

has decreased by 5.6%.

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