Enterprise: Goodyear is without doubt one of the world’s main producers of tires, participating in operations in most areas of the world. The corporate develops, manufactures, distributes and sells tires for many functions. It additionally manufactures and sells rubber-related chemical substances for numerous functions. Goodyear is without doubt one of the world’s largest operators of economic truck service and tire retreading facilities.

Inventory Market Worth: $3.9B ($14.02 per share)

associated investing information

Share Possession:  ~10.0%

Common Value: n/a

Activist Commentary: Elliott is a really profitable and astute activist investor, significantly within the expertise sector. Their group consists of analysts from main tech non-public fairness corporations, engineers, working companions – former expertise CEO and COOs. When evaluating an funding, in addition they rent specialty and common administration consultants, skilled value analysts and trade specialists. They usually watch firms for a few years earlier than investing and have an intensive secure of spectacular board candidates.

On Might 11, Elliott issued a letter and presentation to Goodyear’s board, urging the corporate to nominate 5 new impartial administrators, monetize the company-owned retailer community, and type an operational assessment committee to develop an operational and margin enchancment plan.

Goodyear is an iconic main world tire producer based 125 years in the past. It’s the market chief in a enterprise that has secure development, is non-cyclical and has robust pricing energy making it considerably resistant to inflation. The corporate sells tires to authentic tools producers (“OEM”) and within the substitute market, with 80% of its gross sales coming from the substitute market. Furthermore, there’s a latest development with their OEM shoppers towards costlier automobiles, which improves Goodyear’s mixture of automobiles from extra commodity-like automobiles with numerous worldwide competitors to extra luxurious automobiles requiring higher-end tires — the place Goodyear excels. Whereas the OEM market is just 20% of the corporate’s enterprise, this development permeates their different 80% as a result of folks usually change tires with the identical model. 

Nonetheless, regardless of these benefits, the inventory has considerably underperformed friends, and relative to the mid-cap S&P 400, it has underperformed by 90% over the previous 5 years and 143% over the previous ten years. A variety of this underperformance is a results of (i) margin erosion –  regardless of main scale, its margins are the bottom within the tire trade, trailing its closest friends, Michelin and Bridgestone, by about 700 foundation factors; (ii) underutilized retail platform – the corporate owns roughly 1,025 top-rated auto service retail shops, however have didn’t leverage its client model into rising a high-value retail platform; and (iii) lack of investor confidence –  over the previous a number of years, it has didn’t ship monetary targets and has constantly lowered and pushed out margin enchancment guarantees. Consequently, the corporate is now capital-constrained and unable to pursue value-creating alternatives, resembling high-ROIC investments to help rising its retail retailer platform.

There are a number of alternatives right here for worth creation, which Elliott believes might result in a further $21 per share in worth. Goodyear has the possibility to monetize its company-owned retailer community via a sale of roughly 715 shops, the proceeds of which may very well be used to pay down debt, enhancing its steadiness sheet and monetary flexibility. These shops generate lower than 10% of the corporate’s income and promoting them might generate greater than $4 per share, whereas permitting the retail platform to develop below extra targeted and better-capitalized possession. One other alternative for the corporate is to give attention to an operational and margin enchancment plan. A complete assessment of Goodyear’s promoting, common and administrative bills might drive at the least 114 foundation factors of margin enchancment, whereas a redesign of their go-to-market and model methods might drive an incremental 271 foundation factors of working margin growth, resulting in greater than $16 per share of worth. With friends Michelin and Bridgestone at 11.5% and 12.2% working margins, respectively, Goodyear has vital room for enchancment with its 4.8% working margins.

In its letter, Elliott states that it “reached these conclusions after an exhaustive analysis and diligence course of … engaged in thorough due diligence with the assistance of top-tier consultants, authorized counsel and funding bankers, and carried out scores of interviews with former Firm staff, fellow shareholders and trade executives.” This isn’t Elliott going the additional distance however normal working process for the agency. Elliott has a group of analysts, consultants and trade executives that it really works with in figuring out funding alternatives and creating plans to create shareholder worth. And that is evident in its letter and detailed presentation. The agency doesn’t suggest a short-term repair involving monetary engineering and layoffs (in reality, Elliott particularly states it’s not in favor of extra leverage and layoffs), however a long-term, properly thought-out and complete governance, operational, strategic and monetary plan that won’t solely repair the corporate’s issues however put it on a long-term trajectory to learn shareholders for years to return. That is the kind of letter and plan that you simply need to see from activists and infrequently see from skilled activists like Elliott.

To implement its plan, Elliott is recommending including 5 new administrators to the board. Elliott doesn’t state that it needs to switch 5 present administrators, however at at the moment 12 administrators, there would have to be some attrition to keep away from having an unwieldy 17-person board. There are actually a number of administrators who needs to be prepared to maneuver on. Six members of the 12-person board (together with CEO Richard Kramer) have served on the board for 11+ years. Throughout this time, the corporate has been a serial underperformer with the identical CEO who has additionally retained the titles of president and chairman. I’m not ideologically in favor of separating all CEO/chairman positions. For instance, I by no means had an issue with Warren Buffett being chairman and CEO of Berkshire Hathaway. However when an organization underperforms so severely for 13 years, the board ought to in all probability search for a brand new CEO however on the very least, separate the roles of chairman and CEO. This, together with the underperformance and tenure of many administrators makes for a compelling case for severe board reconstitution. It is a nice firm with an iconic model that simply wants contemporary eyes on the board to reinvigorate the enterprise, help administration in executing their marketing strategy and maintain them accountable in the event that they fail to. Elliott mentioned it has recognized 5 new impartial director candidates who it believes might assist enhance governance, improve the tradition and assist restore investor confidence. The agency has not publicly disclosed the identification of those candidates. Primarily based on its historical past, we’d anticipate this to be a diversified and certified group of trade {and professional} administrators with one Elliott govt. Elliott proper now’s working amicably with administration and recommending potential administrators versus threatening to appoint their very own slate of administrators. This rapport will proceed for a while because the 2024 director nomination deadline doesn’t open till Dec. 12. We might anticipate Elliott and the corporate to achieve an settlement earlier than then.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.