In this series, we take a look at the 25 stocks on the S&P 500 Index (SPX) that have turned in the worst performance during the past decade -- what went wrong, and what happens next.
More than one U.S. automaker found its way onto our roster of SPX underperformers, and so it comes as no surprise that The Goodyear Tire & Rubber Company (NYSE: GT) also makes an appearance. The stock peaked at $76.75 in March 1998 -- around the same time that Plains Resources agreed to acquire GT's All American Pipeline System, along with two other businesses, for $420 million in cash.
What went wrong? At number 20 on our list of SPX losers, GT shed 72% of its value during the 10-year period ending June 30, 2008. Declining auto sales at General Motors (NYSE: GM) is a topic that's made headlines as recently as this month, but Goodyear started feeling the impact of slowing auto sales well before the millennium turned.
Just about ten years ago, in the summer of 1998, a strike at GM resulted in an oversupply of tires. Goodyear was forced to lay off workers, and the company's third-quarter earnings report was a disappointment that year. In a bid to stay competitive in the struggling auto industry, Goodyear teamed up with Sumitomo Rubber Industries. It was not just a strategic move; it was a merger that fulfilled the recent prophecy of then-CEO Samir Gibara: he'd vowed in 1998 that Goodyear would surpass Bridgestone and Michelin to be the #1 tire company in the world. Of course, this particular bragging right cost the company $936 million ... and let's just say that GT couldn't exactly write a check for that amount.
By October 1999, the rapidly aging GT found itself booted out of the storied Dow Jones Industrial Average to make room for the likes of fresh-faced tech upstarts Microsoft (NASDAQ: MSFT) and Intel (NASDAQ: INTC). In the coming years, increased raw-material costs and a general malaise in the U.S. economy led Goodyear to a string of quarterly losses. The company was forced to restructure, and workers around the globe were laid off in droves. Sure, the industry was lagging, but Goodyear was lagging the industry. Then, in 2003, it was discovered that GT's accounting practices were less than proper (to put it kindly). A formal SEC probe followed; by April 2004, the one-time titan of tires confessed that its operating earnings for the previous six years would be reduced by $65 million.
What next? We hate to be the bearers of bad news, but the auto industry is enduring another one of those rough periods. With gas prices sky-high and the word "stagflation" hitting the Street, it's starting to feel like a flashback to the '70s.
Meanwhile, on the charts, GT is flashing back to lows it hadn't previously approached since December 2006. The shares are down 27% year-to-date, and are trading sub-$20 -- yet, Thomson Financial reports that the average price target on Goodyear is $30.80. You almost have to figure that at some point, when the entire finance sector has been appropriately downgraded, the various analysts will realize they also need to readjust their expectations on this auto-dependent manufacturer.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the weekly video series Option Basics on SchaeffersResearch.com.
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Reader Comments (Page 1 of 1)
8-04-2008 @ 8:57AM
Sandy said...
Goodyear's stock has been on a downward spiral losing almost half its value in one year since its decision to take Lidy Ledbetter to the Supreme Court to say, "women do not deserve the same rights such as fair pay as men.". Lidy's manager said "we do not need women". Since women purchase 65% of new cars, influence 95% of new car purchases, maybe Goodyear does not need women's business as well. The boycott from the NOW Organization has worked. Many women stopped buying Goodyear tires and Goodyear has seen one of the biggest one year drop in the history of their country. Maybe Goodyear should be a little kinder to women. Maybe their should have a talk with women's organizations and tell them that they want to reverse the Supreme Court decision for the betterment of their company and for one of theri largest buying segment - women. Maybe at Goodyear's shareholder meeting, this issue can be brought up. Shareholders deserve their stock to rise - after all, they are paying the big salaries for Goodyear's executives to use common sense decision making to take care of shareholders and their consumers.
9-14-2008 @ 9:14AM
Richard said...
I have an RV, 2 cars, 1 truck and 1 trailer for a total of 20 tires. All were goodyear tires. They when I got a brand new RV. We went on a trip to Ohio. While in Ohio my right front tire blow out. This was in Cleveland. Went to a tire shop to get another tire. Cost was $356.97 total. The old tire which had all of 2344 miles on it had a bad sidewall. the tire place sent the tire back to goodyear for adjustment, which the said was my fault for hitting the tire against a curb. No adjustment was due. I know that I hit no curb with the front tire. I fought with goodyear over 6 mounths over this tire, only to lose. Even the tire shop said they thought it was a sidewall defect. You ask what this cost Goodyear tire. As a goodyear costumer. I changed all my tires to an other brand. Did I hurt goodyear?? Not sure, but I do not send them any new people. It cost me arount $4000.00 to change tire companys. where they could have keep me buying their tires I went some place else. If 100 goodyear buyers had this same problem, How much did this cost them. I feel if you are proud of what you make and sell then back it to a point. I know that I did not damage the tire in anyway. But to hear them talk it was all my fault. GOODYEAR work with the people you sell your product to. Talk to them, hear what we are saying. Give a little. If you don't hear the people and you lose the people then where are you??? Not saying that you were totaly wrong, But with only 2300 miles on the tire. you could offer some kind of adjustment....