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Should You Buy Goodyear Tire & Rubber on the Dip?

The shares of one of the world’s largest tire manufacturers, Goodyear Tire & Rubber (GT), have plunged in price on the company’s disappointing financial guidance. However, according to a J.P. Morgan analyst, the selloff was an ‘overreaction.’ So, the question is, is it worth buying the dip in GT? Keep reading to learn our view.

The shares of the largest U.S.-based tire manufacturer, Akron, Ohio-based Goodyear Tire & Rubber Company’s (GT), have gained 17.1% in price over the past year and 4.6% over the past six months to close the last trading session at $16.01. One of the company’s most strategic moves from the previous year was its acquisition of Cooper Tire & Rubber Company. “This combination strengthens Goodyear’s ability to serve more consumers globally and provides increased scale to support greater investments in new mobility and fleet solutions,” according to Richard J. Kramer, Goodyear chairman, chief executive officer, and president.

However, the stock is down 24.9% in price year-to-date. Despite reporting solid fourth-quarter and full-year results, outpacing expectations, the stock plunged. Investors’ concerns rose on the company’s warning that inflationary pressures are likely to continue this year and management’s outlook for breakeven free cash flow. GT has struggled with rising costs and semiconductor shortages, but strong demand for its products and higher selling prices helped offset inflationary cost pressures. Indeed, GT achieved its highest fourth-quarter revenue in nearly 10 years.

However, J.P. Morgan analyst Ryan Brinkman characterized the stock’s selloff as an “overreaction” that provides a compelling buy opportunity for investors. He also upgraded the stock to overweight from neutral and sees “deep value for patient investors.”

Here is what could shape GT’s performance in the near term:

‘Smart’ Developments

Last month, GT announced it had developed and is testing a custom-engineered non-pneumatic (airless) tire (NPT) to support Starship delivery robots. Starship Technologies is a Goodyear Ventures portfolio company that builds and operates a network of autonomous robots that carry and deliver packages, groceries, and food directly to customers. Also, in December, GT announced the launch of its new ElectricDrive GT, marking GT’s first replacement tire in North America tuned for electric vehicles (EVs). This development should aid the company’s growth in the fast-evolving EV landscape.

Last November, GT and the Stark Area Regional Transit Authority (SARTA), two Northeast Ohio-based leaders in future mobility, announced a collaboration to test intelligent tire sensors and prototype tires on SARTA’s fleet of diesel and zero-emission hydrogen fuel cell-powered (HFC) buses. This collaboration is expected to provide opportunities for advancing its capabilities in the ‘tires of tomorrow.’

Stable Financials

The company’s revenues have grown at a 4.1% CAGR over the past three years and 2.9% over the past five years. Also, its net income has grown at a 3.3% CAGR over the past three years.

For the fiscal fourth quarter, ended Dec. 31, 2021, its net sales increased 38.2% year-over-year to $5.05 billion, topping analysts’ estimates by $91 million. The company’s adjusted net income came in at $162 million, indicating a 57.3% increase from its year-ago value. Also, its adjusted EPS rose 29.5% year-over-year to $0.57, surpassing the consensus estimate by 78.1%.

Discounted Valuation

In terms of forward P/E, the stock is currently trading at 9.15x, which is 38.2% lower than the 14.80x industry average. Also, its 0.58x forward EV/Sales is 55% lower than the 1.30x industry average. And GT’s forward Price/Sales and Price/Cash Flow of 0.22x and 3.50x, respectively, are 79% and 68.4% lower than the industry averages.

POWR Ratings Show Promise

GT has an overall B rating, which translates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has an A grade for Value, which is in sync with its lower than industry valuation.

GT has a B grade for Growth. The company’s stable growth in its last reported quarter justifies this grade.

Among 66 stocks in the Auto Parts industry, GT is ranked #8.

Beyond what I have stated above, one can also view GT’s grades for Quality, Sentiment, Momentum, and Stability here.

View the top-rated stocks in the Auto Parts industry here.

Bottom Line

GT has been facing several challenges, but strong demand for its products helped the company to register robust revenue growth. Analysts expect the company’s revenues to increase 17.9% year-over-year to $20.61 billion in the current year, while its EPS is expected to grow 16.3% year-over-year to $2.43. Also, its EPS is expected to grow 9.1% per annum over the next five years. Its significant market share and its expansionary moves should help drive growth. Thus, we think it could be wise to scoop up GT shares and take advantage of their price dip.

How Does the Goodyear Tire & Rubber Company (GT) Stack Up Against its Peers?

GT has an overall POWR Rating of B. However, one could also check out these other stocks within the Auto Parts industry with A (Strong Buy) rating: Genuine Parts Company (GPC) and Standard Motor Products, Inc. (SMP).

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GT shares fell $0.45 (-2.81%) in premarket trading Tuesday. Year-to-date, GT has declined -26.78%, versus a -8.74% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.


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