Why Shares in Goodyear Popped Higher Today
Key Points
Higher gasoline prices negatively impact tire demand.
Raw material costs, including oil, make up a huge part of Goodyear's cost of goods sold.
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Shares in tire maker Goodyear Tire & Rubber Co (NASDAQ: GT) rose by as much as 6.2% at 11:30 a.m. today. The positive move comes as a sharp price correction in oil led investors to factor in better earnings outcomes for Goodyear.
Goodyear's exposure to oil
The tire maker's exposure to oil comes from two main areas. First, higher oil prices mean higher gasoline prices, and that usually results in a moderation in miles driven. That's bad news for tire companies, as about 70% of industry demand for tires comes from the replacement market.
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Second, raw materials account for a significant portion of a tire company's costs. Raw materials account for around 45% of its cost of goods sold, and 70% of those costs are driven by oil prices.
You could even extrapolate further and argue that the inflationary environment created by soaring energy prices will make it harder to cut interest rates, which will put pressure on automotive sales and, in turn, original equipment tire sales.
Bottom line: High oil prices are not good for Goodyear so today's correction in energy prices is good news.
Where next for Goodyear
The conflict in the Gulf isn't over yet, and it's incredibly difficult to know what comes next. Consequently, investors need to keep an open and reflective mind on matters and not overreact either way. The volatility is likely to continue, including for Goodyear stock.
Should you buy stock in Goodyear Tire & Rubber right now?
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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