Business: Goodyear is one of the world's leading manufacturers of tires, engaging in operations in most regions of the world. The company develops, manufactures, distributes and sells tires for most applications. It also manufactures and sells rubber-related chemicals for various applications. Goodyear is one of the world's largest operators of commercial truck service and tire retreading centers.
Stock Market Value: $3.9B ($14.02 per share)
Percentage Ownership: ~10.0%
Average Cost: n/a
Activist Commentary: Elliott is a very successful and astute activist investor, particularly in the technology sector. Their team includes analysts from leading tech private equity firms, engineers, operating partners – former technology CEO and COOs. When evaluating an investment, they also hire specialty and general management consultants, expert cost analysts and industry specialists. They often watch companies for many years before investing and have an extensive stable of impressive board candidates.
On May 11, Elliott issued a letter and presentation to Goodyear's board, urging the company to appoint five new independent directors, monetize the company-owned store network, and form an operational review committee to develop an operational and margin improvement plan.
Goodyear is an iconic leading global tire manufacturer founded 125 years ago. It is the market leader in a business that has stable growth, is non-cyclical and has strong pricing power making it somewhat immune to inflation. The company sells tires to original equipment manufacturers ("OEM") and in the replacement market, with 80% of its sales coming from the replacement market. Moreover, there is a recent trend with their OEM clients toward more expensive vehicles, which improves Goodyear's mix of vehicles from more commodity-like vehicles with a lot of international competition to more luxury vehicles requiring higher-end tires — where Goodyear excels. While the OEM market is only 20% of the company's business, this trend permeates their other 80% because people generally replace tires with the same brand.
However, despite these advantages, the stock has significantly underperformed peers, and relative to the mid-cap S&P 400, it has underperformed by 90% over the past five years and 143% over the past ten years. A lot of this underperformance is a result of (i) margin erosion – despite leading scale, its margins are the lowest in the tire industry, trailing its closest peers, Michelin and Bridgestone, by about 700 basis points; (ii) underutilized retail platform – the company owns roughly 1,025 top-rated auto service retail stores, but have failed to leverage its consumer brand into growing a high-value retail platform; and (iii) loss of investor confidence – over the past several years, it has failed to deliver financial targets and has consistently lowered and pushed out margin improvement promises. As a result, the company is now capital-constrained and unable to pursue value-creating opportunities, such as high-ROIC investments to support growing its retail store platform.
There are several opportunities here for value creation, which Elliott believes could lead to an additional $21 per share in value. Goodyear has the chance to monetize its company-owned store network through a sale of roughly 715 stores, the proceeds of which could be used to pay down debt, improving its balance sheet and financial flexibility. These stores generate less than 10% of the company's revenue and selling them could generate more than $4 per share, while allowing the retail platform to grow under more focused and better-capitalized ownership. Another opportunity for the company is to focus on an operational and margin improvement plan. A comprehensive review of Goodyear's selling, general and administrative expenses could drive at least 114 basis points of margin improvement, while a redesign of their go-to-market and brand strategies could drive an incremental 271 basis points of operating margin expansion, leading to more than $16 per share of value. With peers Michelin and Bridgestone at 11.5% and 12.2% operating margins, respectively, Goodyear has significant room for improvement with its 4.8% operating margins.
In its letter, Elliott states that it "reached these conclusions after an exhaustive research and diligence process … engaged in thorough due diligence with the help of top-tier consultants, legal counsel and investment bankers, and conducted scores of interviews with former Company employees, fellow shareholders and industry executives." This is not Elliott going the extra distance but standard operating procedure for the firm. Elliott has a team of analysts, consultants and industry executives that it works with in identifying investment opportunities and developing plans to create shareholder value. And this is evident in its letter and detailed presentation. The firm does not propose a short-term fix involving financial engineering and layoffs (in fact, Elliott specifically states it is not in favor of more leverage and layoffs), but a long-term, well thought-out and comprehensive governance, operational, strategic and financial plan that will not only fix the company's problems but put it on a long-term trajectory to benefit shareholders for years to come. This is the type of letter and plan that you want to see from activists and often see from experienced activists like Elliott.
To implement its plan, Elliott is recommending adding five new directors to the board. Elliott does not state that it wants to replace five current directors, but at currently 12 directors, there would need to be some attrition to avoid having an unwieldy 17-person board. There are certainly several directors who should be ready to move on. Six members of the 12-person board (including CEO Richard Kramer) have served on the board for 11+ years. During this time, the company has been a serial underperformer with the same CEO who has also retained the titles of president and chairman. I am not ideologically in favor of separating all CEO/chairman positions. For example, I never had a problem with Warren Buffett being chairman and CEO of Berkshire Hathaway. But when a company underperforms so severely for 13 years, the board should probably look for a new CEO but at the very least, separate the roles of chairman and CEO. This, along with the underperformance and tenure of many directors makes for a compelling case for serious board reconstitution. This is a great company with an iconic brand that just needs fresh eyes on the board to reinvigorate the business, assist management in executing their business plan and hold them accountable if they fail to. Elliott said it has identified five new independent director candidates who it believes could help improve governance, enhance the culture and help restore investor confidence. The firm has not publicly disclosed the identity of these candidates. Based on its history, we would expect this to be a diversified and qualified group of industry and professional directors with one Elliott executive. Elliott right now is working amicably with management and recommending potential directors as opposed to threatening to nominate their own slate of directors. This rapport will continue for some time as the 2024 director nomination deadline does not open until Dec. 12. We would expect Elliott and the company to reach an agreement before then.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.