Goodyear Pumped With Tire Profits

7/6/2015


  Recent Price
$30
  Dividend
$0.24
  Yield
0.8%
  P/E Ratio
11
  Shares (millions)
274
  Long-Term Debt As % Of Capital
57%
  52-Week Price Range
$32.74 - $18.87

Formed in 1898, Goodyear Tire & Rubber ($30; GT) initially sold bicycle and carriage tires, horseshoe pads, and poker chips. By the 1980s, Goodyear had grown into a bloated conglomerate that built wheels, aircraft canopies, and even dabbled in gas pipelines.

Today those businesses not related to rubber are long gone, as Goodyear has refocused on its core operations. New tires accounted for 87% of Goodyear's revenue last year, the remainder coming from rubber-related chemicals and about 1,200 tire and auto-service shops.

Goodyear tends to be a jittery stock, with exposure to the highly volatile market for synthetic and natural rubber. For now, commodity-price trends tilt in Goodyear's favor. The company's raw-material costs fell 9% last year and are projected to decrease 12% in 2015.

The stock's volatility seems well discounted in its price. In Quadrix, Goodyear scores in the cheapest quintile for price/sales, price/cash flow, and price/earnings ratios using both trailing and estimated current-year profits. At 11 times trailing earnings, the stock trades in line with its 10-year average. Goodyear, earning a Value rank of 95 and Overall rank of 98, was initiated in the June 29 issue as a Long-Term Buy.

Prizing profits over sales

Sales have declined 7% to 8% in each of the past three years, hurt by foreign-currency headwinds, weaker pricing, and soft volumes. But Goodyear has a knack for wringing more profits out of less revenue. Net income has surged in recent years on lower raw-material costs and the divestment of high-cost plants. In 2014, Goodyear posted its highest operating profit margins since 1996.

Encouragingly, tire volumes are starting to improve. Goodyear's volumes rose 2% in the March quarter, and the company projects a gain of 1% to 2% for the year.

Moreover, Goodyear announced in June plans to dissolve a venture that involved joint ownership of Dunlop-branded tires in the U.S., Europe, and Asia. Goodyear will pay a net price of $271 million to take full control of the venture in Europe, divest the North American venture while still retaining the right to sell Dunlop tires in most markets there, and gain full ownership of the Goodyear brand in Asia. As a result, Goodyear expects annual revenue to decline by $100 million, though per-share profits should rise $0.15 to $0.18 due to the reduction in noncontrolling interest expense.

Operating cash flow totaled $1.62 billion for the 12 months ended March, nearly five times higher than the prior 12-month period. Goodyear has also generated $651 million in free cash flow over the past year.

Conclusion

Investors may have to wait until 2016 for sales to begin growing again. But Goodyear continues to improve efficiency, last month announcing plans to shutter a plant in England and move operations to lower-cost regions. The consensus calls for 5% higher per-share profits in 2015, despite 9% lower revenue.

An annual report for The Goodyear Tire & Rubber Co. available at 200 Innovation Way, Akron, OH 44316; (330) 796-2121; www.goodyear.com.

GOODYEAR TIRE & RUBBER
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '15
0.54
vs.
0.56
-10%
28.98
-
23.74
10 - 8
Dec '14
0.59
vs.
0.74
-9%
28.85
-
18.87
10 - 6
Sep '14
0.87
vs.
0.68
-7%
28.70
-
22.32
10 - 8
Jun '14
0.80
vs.
0.76
-5%
28.48
-
23.79
10 - 9
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Est.
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
18.14
2.83
0.22
28.85
-
18.87
10 - 7
2013
19.54
2.63
0.05
24.00
-
11.83
9 - 4
2012
20.99
1.83
0.00
15.80
-
9.23
9 - 5
2011
22.77
1.87
0.00
18.83
-
8.53
10 - 5
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
98
59
95
94
41
72
70

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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