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

Goodyear Tire & Rubber Co. shares made a sharp turnaround to plunge deep into negative territory on Friday, after the tire maker followed a strong earnings report with a disappointing full-year outlook for cash flow. available.

The stock first surged in premarket trading after the GT company,
reported fourth-quarter earnings well above expectations. It peaked with a gain of up to 7.5% about 10 minutes before the bell opened and then the bottom fell.

Chief Financial Officer Darren Wells said about 28 minutes into the post-earnings conference call with analysts, which was scheduled to begin at 9:00 a.m. EST, that the company was “targeting free cash flow of 2022 around equilibrium”. That compares to cash flow from operating activities of $1.06 billion in 2021.

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

The stock plunged 23.9% in very active midday trading to a five-month low. That put it on track to suffer the biggest one-day percentage selloff since the record 28.6% plunge on Oct. 19, 1987, a day known as “Black Monday” for the DJIA of the Dow Jones Industrial Average,
record drop of 22.6% that day.

Trading volume soared to more than 32.6 million shares, from a full-day average over the past 30 days of about 3.9 million shares, according to FactSet.

FactSet, MarketWatch

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

When the acquisition of Cooper Tire & Rubber Co. was announced in February 2021, Wells noted that it would take two years before net debt leverage would return to pre-deal levels, but the company has in fact achieved this goal at the end of 2021, a year earlier.

“And the fact that we had our balance sheet in better shape earlier, I think that made us feel like it’s appropriate to be a little more aggressive when it comes to investing,” Wells said.

He said in particular that the investments are aimed at ensuring factories have the capacity to support the tires that Goodyear will design and manufacture for electric vehicle platforms, “which has been a growing part of our [original equipment] editing wins.

The reason for FCF’s equilibrium outlook did not seem to matter to investors as the stock’s sell-off continued.

Meanwhile, the stock initially gained after the company reported net income that rose to $553 million, or $1.93 per share, from $63 million, or 27 cents per share, at the end. same period a year ago. Excluding one-time items, such as a $379 million tax benefit, adjusted earnings per share rose 44 cents to 57 cents, beating the FactSet consensus by 32 cents.

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

Cost of sales rose 42.1% to $3.97 billion, which effectively reduced gross margin to 21.5% from 23.6%.

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

Goodyear stock has now fallen 29.5% over the past three months, while the S&P 500 SPX index,
fell 3.4%.

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