Analysts' Choice: Consider Goodyear For The New Year

1/4/2016


  Recent Price
$33
  Dividend
$0.28
  Yield
0.8%
  P/E Ratio
11
  Shares (millions)
274
  Long-Term Debt As % Of Capital
53%
  52-Week Price Range
$35.30 - $23.74

Goodyear Tire & Rubber ($33; GT) shares have surged 12% since the end of August, outpacing the 4% gain of the S&P 1500 Index. Tailwinds in the automobile market should continue to lift the tire supplier. Automakers are on the verge of breaking 2000's record year for U.S. sales, while U.S. road traffic rose 3.4% in the first 10 months of 2015.

Both trends favor Goodyear, which sells 30% of its tires to original-equipment manufacturers and the remaining 70% as replacements. Of course, not all of Goodyear's tires are destined for cars. In December, Goodyear won a contract to supply the main nose and landing-gear tires for Boeing's ($146; BA) new 777X aircraft, scheduled for initial delivery in 2019.

Goodyear's stock does not always provide a smooth ride. Operating results can be volatile, making Goodyear an aggressive pick. But its Value rank of 91 bakes in plenty of investor skepticism. Goodyear is a Buy and a Long-Term Buy.

Profitability trumps sales

The stronger U.S. dollar has depressed Goodyear's sales, down 10% in the 12 months ended September. Sales growth could also be limited in the year ahead, given that Goodyear in October dissolved a joint venture involving Dunlop-branded tires. Management expects this decision to reduce annual revenue by $100 million but boost per-share profits due to the reduction in noncontrolling-interest expense.

Nevertheless, underlying operations remain strong. Goodyear is seeing higher tire volumes, particularly in North America, which represents 47% of sales. Cash from operations has risen in five consecutive quarters, exceeding 30% growth in the last two of those periods. Gross profit margin has risen in 14 straight quarters. The company estimates costs for raw materials fell 11% in 2015, following declines of 9% in 2014 and 13% in 2013.

Although the dip in raw-materials prices may not be sustainable, Goodyear has made several other moves to reduce costs. In the past few years, management has overhauled its pension plan and fortified its balance sheet in the hope of upgrading its credit rating to investment-grade.

Goodyear has historically struggled to generate positive free cash flow. But it managed to produce $903 million in free cash flow for the 12 months ended September. The stock earns a free-cash-flow yield of 10% (free cash flow/stock-market value), ranking among the cheapest 7% of S&P 1500 nonfinancial stocks.

Growth and value

Both free cash flow and per-share profits could get an additional boost in coming years — Goodyear refinanced some of its $5.59 billion in long-term debt in November. The consensus expects Goodyear to grow per-share profits 21% in 2016 on 1% higher revenue.

Shares trade at just nine times estimated 2016 earnings, ranking among the cheapest 15% of stocks in our Quadrix universe. At 11 times trailing earnings, the stock fetches an 26% premium to its five-year average but ranks among the cheapest decile (one-tenth) of stocks in Quadrix.

An annual report for The Goodyear Tire & Rubber Co. is 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
Sep '15
0.99
vs.
0.87
-10%
32.95
-
25.50
12 - 9
Jun '15
0.84
vs.
0.80
-10%
32.74
-
26.38
12 - 9
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
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
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
99
87
91
95
48
74
77

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


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com