Goodyear Tire & Rubber Co Stock Is Estimated To Be Significantly Overvalued

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GF Value
Jun 16, 2021
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The stock of Goodyear Tire & Rubber Co (NAS:GT, 30-year Financials) is believed to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $18.365 per share and the market cap of $5.2 billion, Goodyear Tire & Rubber Co stock is estimated to be significantly overvalued. GF Value for Goodyear Tire & Rubber Co is shown in the chart below.

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Because Goodyear Tire & Rubber Co is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.

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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company’s financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company’s financial strength. Goodyear Tire & Rubber Co has a cash-to-debt ratio of 0.18, which ranks worse than 78% of the companies in Vehicles & Parts industry. Based on this, GuruFocus ranks Goodyear Tire & Rubber Co’s financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of Goodyear Tire & Rubber Co over the past years:

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Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Goodyear Tire & Rubber Co has been profitable 8 years over the past 10 years. During the past 12 months, the company had revenues of $12.8 billion and loss of $2.66 a share. Its operating margin of 0.51% worse than 72% of the companies in Vehicles & Parts industry. Overall, GuruFocus ranks Goodyear Tire & Rubber Co’s profitability as fair. This is the revenue and net income of Goodyear Tire & Rubber Co over the past years:

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Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company’s stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Goodyear Tire & Rubber Co is -4.7%, which ranks worse than 68% of the companies in Vehicles & Parts industry. The 3-year average EBITDA growth rate is -71.4%, which ranks in the bottom 10% of the companies in Vehicles & Parts industry.

Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Goodyear Tire & Rubber Co’s return on invested capital is 0.41, and its cost of capital is 5.71. The historical ROIC vs WACC comparison of Goodyear Tire & Rubber Co is shown below:

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Overall, the stock of Goodyear Tire & Rubber Co (NAS:GT, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Vehicles & Parts industry. To learn more about Goodyear Tire & Rubber Co stock, you can check out its 30-year Financials here.

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