Goodyear Tire & Rubber Company - Worth Buying After Hitting Multi-Year High?

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May 27, 2015

The Goodyear Tire & Rubber Company (GT, Financial), one of the largest tire manufacturing companies in the world, hit a multi-year high on the stock market earlier this month in a rally that started in April, surpassing the 2008 peak. The tire company posted its first-quarter fiscal 2015 results, which beat on earnings but missed on revenue. Let’s take a look at the results and see if it still is a good stock to buy.

First-quarter recap

Consolidated sales during the first quarter came in at $4.02 billion, representing a 10% year-over-year decline and marginally missing consensus estimates. The sharp decline was due to currency translation headwinds which more than wiped off all gains from 2% year-over-year growth in unit volume.

During the quarter, segment operating margin expanded in all regions with Latin America at record 380 basis points (bps), followed by 240 bps in North America and 170 bps in APAC region. EMEA, however, contracted by 110bps. Gross margin rate during the quarter expanded 253 bps to 23.81.

Even though adjusted earnings per share declined 3.6% year-over-year to $0.54, it handsomely beat the consensus estimates by $0.12.

HVA tires to fuel growth

In Americas, the demand for high-value-added, or HVA, tires is expected to grow at a rate of 10 million tires between now and 2019. This is because the industry demand for HVA tires is increasing at a rate of 18 million units per year, while demand for low value-added products is expected to decline by 8 million units per year over the same period in the Americas. This equates to an additional demand of 90 million HVA tires by 2019.

In order to meet this burgeoning demand for HVA tires in Americas and also grow customer base, the company announced that it will be investing in new HVA tires plant in Mexico. Once commissioned in mid 2017, this will produce 6 million units of HVA tires annually.

So, this will be a good top- and bottom-line growth driver from mid-2017 onward.

Ecommerce – another growth driver

Goodyear is also piloting an e-commerce platform for Goodyear Consumer Replacement tire sales online. More than 3,000 locations have already signed up for the program which will make the process of tire buying easier for consumers.

Good valuations

Price to forward sales (P/S) ratio is 0.48 means that investors are paying $0.48 for every dollar of revenue generated by the company. When stacked against industry average of 0.65, we find that Goodyear is relatively undervalued on this metric.

Forward Price to Earnings (P/E) ratio is at 9.22, which is enticing. Value investors look at stocks with a forward P/E of generally below 20, though this could vary by industry and sector. When stacked against industry average of 13.54, we find that Goodyear is relatively undervalued on this metric.

Wrapping up

For fiscal 2015, Goodyear expects annual segment operating income to grow in the range of 10–15%. In addition, the tire manufacturer aims to achieve positive annual free cash flow during the year.

For the next five years, analysts expect compound annual growth rate of 11%. The burgeoning demand for HVA tires is a tailwind for the company and it is already gearing up by putting up a new plant in Mexico. The company’s Eagle performance tires have been chosen exclusively for the all-new Chevrolet Camaro 2016 model.

Give the good valuations and strong growth potential of HVA tires, the stock is a good buy at current prices, despite the run-up to all time high recently.