Today, we look at Goodyear Tire & Rubber Co., the largest tire maker in the world. Goodyear has recently seen its revenue fall as the strong U.S. dollar has cut into the value of its sales outside of the U.S. However, the company expects earnings to rise over the next year and beyond as cost cuts in Europe and lower costs for materials such as oil and rubber take effect. In addition, a new $550-million plant in Mexico that will make tires for the growing high-performance tire market will add revenue starting in 2017. With a price to earnings ratio of 11.2, Goodyear’s stock is inexpensive. We recommend Goodyear Tire & Rubber Co. as a value stock to buy.
GOODYEAR TIRE & RUBBER CO. (Nasdaq symbol GT; www.goodyear.com) is the world’s largest tire maker, with 50 plants in 22 countries.
In the three months ended September 30, 2015, Goodyear’s revenue fell 10.2%, to $4.18 billion from $4.66 billion a year earlier. The rising U.S. dollar cut the value of the company’s foreign sales (particularly in Europe and Brazil) by $430 million.
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Earnings rose 12.0%, to $271.0 million, or $0.99 a share. A year earlier, the company earned $242.0 million, or $0.87 a share.
Goodyear has reaffirmed its targets for the next 12 months and expects its earnings to rise 10% to 15%.
The gains will come from lower costs, including for oil, rubber and other raw materials. Plus it has a favourable labour deal with the United Steelworkers.
Further gains should come from the company’s leading share in the fast-growing market for high-end replacement tires. These cost more than basic models but provide better performance, safety and fuel economy.
Value stocks: Cost-cutting to offset weaker profits from Europe
North America is the largest market for these tires, and Goodyear is building a $550-million plant in central Mexico to support rising demand. The facility will start up in mid-2017 and will be able to produce up to six million high-performance tires a year. Brands will include the company’s new Kelly Edge tires, as well as Wrangler All- Terrain Adventure and Assurance Fuel Max.
In addition, the company recently launched a popular e-commerce system that lets consumers research, select and pay for tires using a smartphone or tablet. They can then book the installation at a nearby Goodyear dealer.
Goodyear has also undertaken cost-cutting in its European operations. It has said it will shut down its Wolverhampton plant in the U.K. and transfer its production to its other European facilities. It will also slow passenger-tire production at its Wittlich plant in Germany. These plans could result in 360 to 390 layoffs.
Goodyear’s European profits have weakened for a number of reasons, including the continent’s sluggish economy, a high U.S. dollar (which lowers the value of its European sales) and increased competition from rivals like Michelin, Continental and Pirelli.
The company will incur a one-time charge of up to $80 million for the cuts, which it expects to complete by the end of 2016. But it will save as much as $30 million annually starting in 2017.
The stock trades at just 11.2 times the $3.00 a share the company is forecast to earn for all of 2015.
Recently the company raised its quarterly dividend by 16.7% with the December 2015 payment, to $0.07 from $0.06. This is the 17th straight year the company has raised its payout. The shares now yield 0.8%.
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