The Goodyear Tire & Rubber Company (GT, Financial) is a global manufacturing company founded in 1898 by Frank Seiberling and based in Akron, Ohio. The stock has nearly doubled in the last few months; however, investors are still skeptic about it due to falling rubber prices and a strong U.S. dollar. However, I think the headwinds are blown out of proportion and Goodyear Tire is a buy at present valuation.
A look at the past quarter
For the first quarter 2015, the company delivered segment operating income of $391 million followed by operating margin of 10% in spite of the noteworthy foreign exchange breezes. Segment operating income increased 5%, which when adjusted for forex would have been 16%.
The company recorded first quarter segment operating income of $198 million. It is the 23rd consecutive quarter of year-over-year earnings growth. Segment operating margin was recorded 10.7%, the fourth consecutive quarter of at least 10% segment operating margin.
Gross margin and SOI margin were 23.8% and 9.7% respectively for this quarter. Earnings per share on a diluted basis were $0.82. Europe, Middle East, and Africa stated segment operating income of $73 million, a decrease of about 34% from last year’s $110 million.
Currency Headwinds
The strength of the US dollar is the major factor hurting Goodyear at present time, which the company guesses as a $180 million headwind at currency spot charges. The company has taken a meticulous approach to reducing Goodyear's debt burden, and has enhanced North American operations -- the segment that displayed the best earnings last year. The company’s prime business segment is North America, and this will attest an advantage to the company as the U.S. frugality remains to improve, and both commercial businesses and retail customers buy into an energized Goodyear brand.
The company is leading their e-commerce policy for Goodyear customer Replacements tire sales online. 3,000 sites have signed up for the package. This program mainly focuses on purchasing tire process with their industry-leading supplier network.
The stronger dollar is also accountable for the drop in oil which is liable for the increased demand in automobiles.
A sign of worry?
One factor for which the sell-side forecasters are concerned about is the influence of the decline of rubber prices on the company’s earnings. The price of rubber has been declining since 2011, and this drop has affected the company’s operating profit. Still, the increased operating efficiency is the reason behind the Goodyear’s profit gain.Â
Conclusion
Goodyear trades at just 3 times trailing-12-month earnings, and at only 7x forward earnings. The company is currently cheap and doesn’t have any major headwinds. The company is increasing its margin and has managed to offset the lower costs of rubber and has performed well in the tough time. Hence, I think Goodyear is a buy.
