Why is the stock of Goodyear Tire & Rubber Co. So Volatile?

Goodyear (GT) is a very volatile stock with a beta of 1.86, measured using a linear regression model. This linear regression model used monthly returns for Goodyear and the Vanguard S&P 500 Index ETF (VOO) from June 2019 to January 2023. This beta is one of the highest I have encountered among the stocks I cover (Exhibit 1).

Image: 90% Sustainable Material Demonstration Tire

Source: Goodyear Tire & Rubber Co.

The stock is heavily dependent on the discretionary spending of the consumer. In a downturn, car sales drop, thus affecting Goodyear's sales. The replacement tire sales also drop in an economic slowdown, affecting the company. These might be the reasons behind the high volatility.   

Note: Please click on the image to see an enlarged version.

Exhibit 1: Beta of Stocks in Industrial, Consumer Staples, Technology, and Consumer Discretionary Sectors  

Source: Data Provided by IEX Cloud, Author Calculations using Microsoft Excel & RStudio

Here's the output from the linear regression model:

Call:

lm(formula = GT_Monthly_Return ~ VOO_Monthly_Return, data = VOOandGT)

Residuals:

     Min       1Q   Median       3Q      Max 

-0.21099 -0.10456 -0.01782  0.07052  0.55012 

Coefficients:

                    Estimate Std. Error t value Pr(>|t|)    

(Intercept)        -0.008481   0.021853  -0.388      0.7    

VOO_Monthly_Return  1.869864   0.379106   4.932 1.33e-05 ***

---

Signif. codes:  0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 0.1425 on 42 degrees of freedom

Multiple R-squared:  0.3668, Adjusted R-squared:  0.3517 

F-statistic: 24.33 on 1 and 42 DF,  p-value: 1.326e-05

The coefficient for "VOO_Monthly_Return" is the beta for the stock.  This coefficient is also the slope of the line.  The monthly returns of Goodyear have been plotted against the returns of the Vanguard S&P 500 Index ETF (Exhibit 2). Exhibit 3 shows the residuals from the linear regression mode. There is a solid positive monthly return correlation of 0.61 between the Vanguard ETF and Goodyear. There is also a significant relationship between the monthly returns of the Vanguard ETF and Goodyear, with a p-value of 1.3e-05.     

Exhibit 2: Monthly Returns Plot of the Vanguard S&P 500 Index ETF and Goodyear Tires

Source: Data Provided by IEX Cloud, Author Calculations Using Microsoft Excel, and Graph Plotted Using RStudio

Exhibit 3: Residuals from the Linear Regression of the Vanguard S&P 500 Index ETF and Goodyear Tires Monthly Returns

Source: Data Provided by IEX Cloud, Author Calculations Using Microsoft Excel, and Graph Plotted Using RStudio

Ford's New CEO Faces a Tough Road Ahead

On August 4, 2020 Ford (NYSE: F) announced that they are replacing Jim Hackett - the current CEO - with Jim Farley.  Farley was serving as the Chief Operating Officer at the company. Ford is getting ready to launch the new model for its iconic F-150. The F-150 is the best selling vehicle in the U.S. 

Exhibit: Ford is Launching a New Model of its Most Important Vehicle - The Ford F-150

(Source: SeekingAlpha)

Ford is also reviving its iconic Bronco brand in 2021. The new Bronco, I must admit looks absolutely stunning. 

Exhibit: The New Ford Bronco Line-up

(Source: Ford Website)

Ford is also making a huge commitment to electric vehicles. The company will have 15 electrified vehicle models available by end of the year. The competition in the electric vehicle market is heating up substantially with General Motors releasing a whole slew of vehicles and many other auto makers doing the same.

Exhibit: Ford is Launching New Electric Vehicles

(Source: SeekingAlpha)

Even before this pandemic induced economic crisis, Ford was not generating enough cash flow. It had a meager $0.5 billion in adjusted free cash flow in Q4 2019.

The challenge for Ford is that they were late to the electric car market and their upcoming models may not be differentiated enough. For example, their Escape plug-in hybrid model is advertised as having a 490 mile range. That would be a good range for a plug-in hybrid but there are many vehicle with that range. Given the upcoming competition in the the electric vehicle market will a model such as Escape plug-in hybrid stand out. 

They may have to do what Mary Barra at General Motors (GM) did years ago. She exited unprofitable markets such as Europe and India. Ford may have to exit unprofitable markets and bring their manufacturing capacity in-line with their sales and ensure they can stay profitable in a recession such as the one we are in now. 

Ford has a tough road ahead and in the interim the stock is going to continue under-performing.           

(Disclosure: I do not own Ford stock)