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Goodyear Tire & Rubber Is Still the Top U.S. Tire Maker

April 25, 2014 | About:
James Miller Phd

James Miller Phd

3 followers

The Goodyear Tire & Rubber Company (GT) develops, manufactures, distributes and sells tires and related products and services for automobiles, trucks, buses, aircraft, motorcycles, farm implements, earthmoving and mining equipment, industrial equipment, and other applications.

In this article, let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity.

Innovative Products

The company manufactures and sells tires under the Goodyear, Dunlop, Kelly, Debica, Sava and Fulda brands and various other Goodyear owned house brands, and private-label brands. The company also retreads truck, aviation and off-the-road tires, manufactures and sell tread rubber and other tire retreading materials, provides automotive repair services and other products and services, and manufactures and sell flaps for truck tires and other tires.

In 2013, the company unveiled the new Ultra Grip 8 Performance tire, The UltraGrip 8 Performance is a high-performance tire built to handle the toughest winter snow conditions, the Eagle Sport All-Season, which is a good option for those looking for a little more performance than their stock all-season tires, and the new Wrangler All-Terrain Adventure with DuPont Kevlar, a sturdy off-road tire for light trucks and SUVs.

A Three-Point Plan

The firm will make actions to return its historical margin level despite the slowing European economy which cut tire sales. The company sold the farm tire business in the Europe, Middle East and Africa region. Additionally, Goodyear´s plant in Amiens, France, which had a particularly troublesome past, and has been the site of several violent protests by union members and employees, will be closed. Goodyear focuses on a new plan consisting on three strategic points. The plan targeted market segments, emerging market growth and productivity improvements, totaling $75 million to $100 million through 2015.

Shareholder Value

In September 2013, the company announced the initiation of a $0.05 per share quarterly cash dividend, which was discontinued from Dec 2002. Also, the board authorized a $100 million share repurchase program. These plans show the financial strength of the company. Furthermore, there are no major funded debt maturities until after 2014, and no long-term debt is due until 2016. This obviously reduces the financial pressure on the company as it does not have to project debt repayment.

Analyst Recommendation

The firm is currently Zacks Rank # 3–Hold, and it also has a longer-term recommendation of “Neutral”. A Hold rating indicates that the stock, over the next 1 to 3 months, will perform at an annualized rate of 10.56%, which is very similar to the one projected for the S&P 500. There are no comps with a better Zacks Rank.

Relative Valuation, Earnings and ROE

In terms of valuation, the company sells at a trailing P/E of 12.8x, trading at a discount compared to the industry mean. Earnings per share (EPS) have increased by earning $2.23 versus $0.69 in the prior year. This year, Wall Street expects an improvement in earnings ($3.00 versus $2.23).

In the next graph we include the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance and EPS showed an interesting upward trend in the last five years.

1398434327954.png

Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased from the same quarter one year prior. This is a clear sign of weakness within the company.

Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

GT

Goodyear Tire & Rubber

39.17

CTB

Cooper Tire & Rubber Co

11.2

CTTAY

Continental AG

20.63

Goodyear has a very good current ratio of 39.17% which is higher than the ones registered by Cooper Tire & Rubber Co. (CTB) and Continental AG (CCTAY).

Final Comment

As outlined in this article, Goodyear is one of the world´s largest tire manufacturing companies and we expect to continue in that way due to the launches of innovative products to boost sales, as well as the development of the three-point plan.

I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in the fourth quarter of 2013. Gurus like David Dreman (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Louis Moore Bacon (Trades, Portfolio) have bought it in that time frame.

Disclosure: James Miller holds no position in any stocks mentioned.


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