Goodyear Tire & Rubber (GT, Financial) recently impressed everyone with a record performance in the first quarter of 2015, with a solid improvement across all its key financial elements. Besides that, growth in the volume continues to benefit the company and is expected to increase in the coming quarters. Though the company faced some headwinds due to foreign currency fluctuations, the growth in the sales and volume offset the negative effect. Goodyear is optimistic about its growth in future. A solid increment in net income and profit might attract investors leading to good growth in market share in the future. Let us have a look.
Moving in the right direction
During the quarter, Goodyear displayed good growth in the volume. Out of its potential markets, North America is the main market on which the company is now shifting its focus to. It was the 23rd consecutive quarter for growth in North America. The company is expecting similar growth to continue in upcoming quarters as well. The company was also largely benefited by its attractive product pipeline.
For example, the company introduced a new Kelly Edge line of tires, joining the Goodyear Assurance All Season in the profitable Consumer Replacement mid-tier segment, which saw solid traction in the market, and, its sales reached about 1 million units. This clearly indicates an impressive image of the company among the customers, and a new product introduction might strengthen its market image leading to better sales in future.
Strong growth across the board
To improve the sales of its products, Goodyear is now working on enhancing its e-commerce platform. With this initiative, Goodyear is trying to grow the sales of its Goodyear Consumer Replacement tire. The company has already pin pointed about 3,000 locations, which also have agreed to this program. The main motive behind this effort is to make the tire buying process easier. This part of Goodyear’s innovation strategy is expected to strengthen its industry leading position.
Moving on to Latin America now, it is seeing good demand growth for high value added Goodyear product. To capture these opportunities Goodyear is coming up with refreshed product portfolio across Latin America, and it is laser focusing on capitalizing growth opportunities, even in the volatile markets in that region. However, considering the currency fluctuations, economic and political instabilities, Goodyear is expecting this region to be volatile for some more time in future. But in the long term, the company has great expectations from Latin America.
If we talk about the long term prospects of the tire industry, there is lot to cherish for Goodyear. The total industry demand is expected to grow 10 million units per year till 2019. Not only this, but the market is also expected to be governed by HVA tires demand. Another forecast by the analysts reveal that the demand for the low value added product will decline by 8 million units per year over, which will ramp up the demand for HVA tires till 2019. This is an attractive long term opportunity for Goodyear.
To meet the growing demand for Goodyear brands, HVA tires, and to support the customers’ growth plans, the company has also announced its new American plant to be located in Mexico. This new plant is expected to supply six million tires per year when it comes online in 2017.
Conclusion
Now moving to its fundamentals, the stock looks cheap with a trailing P/E of 3.26 but the forward P/E of 8.98 indicates steady growth in the earnings in the near term. It also has a solid profit margin of 15.41%, which can attract many investors leading to a gain in the market share as well. Analysts on the other hand are expecting demand for tires to increase in future which will also make the stock a good long term holding, as its earnings are growing at a CAGR of 11.00% as compared to the industry average of 10.60%. Hence, Goodyear Tire & Rubber is definitely a good pick as of now.
