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Goodyear Having A Bad Year: GT Stock Deflates Following Abysmal Outlook For New Car Volumes

For those among our reader base holding out hope that recent weakness in new car volumes was nothing more than a temporary blip in an otherwise healthy auto market, you may want to promptly ignore the awful earnings reported by Goodyear Tire and Rubber this morning, a key supplier to the auto OEMs and a critical leading indicator for overall industry volumes.

As Goodyear CEO Richard Kramer pointed out this morning, the company's 2Q earnings "played out much differently than we had expected" driven by weak OEM volumes, primarily in the U.S. and China, on the back of those inflated inventory levels that we've been harping on for so long (see "GM Reports Record "Channel Stuffing": Dealer Auto Inventory Highest Since June 2007").  Here is the CEO on this morning's call:

But the second quarter played out much differently than we had expected. We saw incremental weakness in the OE market, especially in North America and China. During the second quarter, auto manufacturing inventories remained well above normal levels in the US and China due to softer demand than underlying production.

 

We also saw incremental challenges in replacement, which I'll address in a moment. As a result, we reduced our full year US consumer OE industry outlook from about flat at the time of our first quarter call to down 4% to 5%. We continue to closely watch OE industry trends, particularly in China.

 

And third, the OE industry has weakened throughout the year, which added incremental pressure in the replacement market, particularly in the US. As I mentioned earlier, the industry is feeling the impact from a lower SAR this year and from the OE's planned inventory reductions in 2017. The combination of these three factors has led to a first half environment unlike anything that I have ever seen given the favorable trends and miles-driven gasoline prices and employment, which are trends generally supportive of our industry.

So what went wrong in Q2?  Well, volumes crashed in the U.S. for new vehicles and, to a lesser extent, for replacement tires as well...which is ironic given that miles driven continue to increase and, if we're to believe what we're repeatedly told, the consumer is in great condition.

 

But it wasn't just the U.S., European volumes were even worse in 2Q.

 

But don't worry too much, Q2 volumes were just an ephemeral issues and Goodyear management would like to assure you that they'll return to 'normal' double-digit growth next quarter and remain there through 2018....seems like a very reasonable forecast.

 

Of course, that seems somewhat inconsistent with revised guidance calling for U.S. Consumer OE volumes to now be down 4-5% in 2017 and replacement volumes flattish...

 

But that's just the U.S., right?  Oh wait, global volume guidance was slashed too.

 

All of which prompted our favorite question from this morning's conference call courtesy of Morgan Stanley analyst Adam Jonas:

"So just another way of, I guess, asking what the hell happened in the second quarter."

Apparently a lot of GT investors are wondering the same thing...unfortunately, they're not hanging out in the stock long enough to figure it out.