"Wow, that's a sh**load of giant industrial tires collecting dust."
Those were my exact thoughts while sitting for two hours on Sunday at a local Goodyear Tire store, watching four men proceed to put two of my tires on backwards. Although I came for new shoes on the beast -- and felt reasonably sure I had the financial means to pay off a $650 credit card bill by the summer -- it would appear that many businesses operating long haul trucks or dump trucks were not as financially sound. The huge garage was overrun with commercial truck tires to such a degree that my two-door black import barely fit into a service bay.
I didn't ask the shop's owner the reasons behind the clear inventory build, but being of sound investing mind I had a general sense that demand from customers had slowed, and it made more sense to store the tires rather than ship them back to the warehouse.
Naturally, as soon as I got home I ripped through The Goodyear Tire & Rubber Company's (GT) latest financials. While Goodyear Tire execs seem to be a very optimistic bunch, when drilling into the first quarter there were a multitude of signs the U.S. economy is headed for trouble. In a perfect world, more miles being driven by commercial trucks, the more tires are worn out and need to be replaced...and quickly.
For tires that are only moderately worn, if business is flowing in at a steady pace, an owner would likely invest in new tires to keep their trucks running as efficiently as possible. And, if the economy is doing as fine as the current jobs numbers suggest, the lower-end tires typically sold at Wal-Mart (WMT), Action Alerts PLUS charity portfolio holding Costco (COST) or BJ's Wholesale are bought by consumers who either have cash in hand today, or the confidence they will be employed long enough to pay off a $650 credit bill.
Here are the flashing red signals from Goodyear Tire:
- Operating margins rose in all countries Goodyear Tire operates, primarily driven by deflationary costs. Costs are arguably deflationary because global demand has slowed tremendously in the past six months.
- Volumes in the North America consumer business -- excluding one-time items -- were flat year over year. In the third quarter, volumes gained 4%.
- Commercial truck business saw units plunge 12% due to softness in the original equipment manufacturer industry. Execs noted on the earnings call that their expectations for the original equipment in the U.S. have moderately "considerably." The commentary here matched what has been heard from Cummins (CMI) and others like it.
Just to add another layer of analysis, I checked out WD-40's (WDFC) first quarter results. I would argue that seeing as the lubricant maker reported on Jan. 7, before the epic stock plunge, its weak quarter is even more alarming that Goodyear Tire's. Best believe that WD-40 is used to loosen up lug nuts on a commercial truck's tires so they can be replaced. It's also used to make sure joints function properly. But, if demand is slowing down, the spray is not used to loosen up a lug nut (a tire isn't replaced) or de-grease a joint -- the truck is likely parked in the yard.
What WD-40 has to say:
- Company saw increased sales, primarily from pumping more promotions into the marketplace and as a result of a new product. Underlying demand seemed soft -- if it wasn't, why the promotions to move units?
- Inventories declined 1.5%, but total revenue fell quicker, by 4%.
Blame the dollar's resilience. Shout at the TV when a Federal Reserve official comments to media and stocks nosedive. Whatever your poison, a very basic assessment of trends in the U.S. truck industry (as well as recent comments from truckers and railroad workers) suggest the stock market is accurate in re-valuing equities across the board in the first quarter. Not only is the market correct, it may have to do more to find fair value for stocks if business is grinding to a halt and companies can't drum up a good amount of business with discounts.
In the end, I came for tires, but got a refresher on investing.