My initial thesis for an investment in Goodyear Tire & Rubber Company (GT) was for an opportunistic purchase of an average company whose shares have fallen sharply out-of-favor. Since then, activist investor Elliott Management has taken a 10% stake in the company with the goal of pressing the board to revitalize Goodyear, explains Bruce Kaser, editor of Cabot Turnaround Letter.

As a result of the subsequent strategic review, the company will replace its long-running CEO, divest as many as three businesses, and streamline its remaining operations to double the profit margin to 10%. Demand for new and replacement tires should continue to be relatively stable, while pricing will likely remain strong enough to offset rising input costs.

Goodyear has excessive debt, but a key priority for the improved free cash flow is to sharply reduce this burden. One intangible is the Goodyear name – one of the world’s most widely recognized and respected consumer brands. All-in, this turnaround offers significant promise for shareholders.

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