Goodyear: A Good Opportunity for Value Investors

The trick to investing in cyclical stocks is that you should have the nerve to put money in in a bad year and pull it out in a good year. Classic contrarian investing. Simple in theory, but, like diet and exercise, hard to do in practice. Goodyear Tire & Rubber Co. (NASDAQ:GT) is an economically sensitive stock that I think fits the bill of a cyclical company with substantial operating leverage. If the economic forecasts are correct and gross domestic product rises strongly this year and next, then Goodyear should benefit. Auto stocks are up strongly and Goodyear is a large original equipment manufacturer. As the economy recovers, people will aslo get back to commuting, so demand for replacement tires will expand.

Goodyear looks attractive to me because it is trading close to tangible book value and well below its projected free cash flow value.

Goodyear is also lagging behind some of its major peers in stock price recovery from last year’s bear market. The chart below compares Goodyear’s stock performance with Cooper Tire & Rubber (NYSE:CTB) (the second-largest tire manufacturer in North America) with Bridgestone (TSE:5108), the largest tire manufacturer in the world, and Michelin (XPAR:ML), the world’s second-largest tire manufacturer.

It is quite notable that U.S. peer Cooper is up more than 25{46dd52bca0123ad67b2d1222819e83fd0a56e45ca5068239f05f0c514f1e20f9} from last year and Goodyear is down around 25{46dd52bca0123ad67b2d1222819e83fd0a56e45ca5068239f05f0c514f1e20f9}. One probable reason is that Cooper is much less leveraged than Goodyear. Some comparative metrics with global peers are shown below.

Ticker	Company	Price	Market Cap ($M)	Dividend Yield {46dd52bca0123ad67b2d1222819e83fd0a56e45ca5068239f05f0c514f1e20f9}	Debt-to -Equity	PE Ratio (TTM)	FCF Yield {46dd52bca0123ad67b2d1222819e83fd0a56e45ca5068239f05f0c514f1e20f9}	Price-to-Opera ting-Cash-Flow	PB Ratio
GT	Goodyear Tire & Rubber Co.	$10.55	2,459.57	1.52	2.63	0	16.67	2.22	0.86
TSE:5101	Yokohama Rubber Co. Ltd.	¥1,642	2,516.43	3.90	0.67	14.65	17.04	3.19	0.68
XPAR:ML	Cie Generale des Etablissements Michelin SA	€113.90	24,654.82	1.76	0.71	27.18	6.67	6.72	1.66
TSE:5108	Bridgestone Corp.	¥3,868	24,244.21	2.71	0.49	34.71	9.27	5.65	1.28
CTB	Cooper Tire & Rubber Co.	$36.75	1,851.24	1.14	0.32	11.89	21.98	3.37	1.39

Debt

While debt is high, maturities are spread out and interest rates are low and will very likely remain at this level for some time. As the recovery progresses, I anticipate Goodyear will not have a problem managing the debt. All Goodyear bonds are trading above par and are rated B2, B3 / B+ by Moodys and S&P. Goodyear has also suspended its dividend as it seeks to navigate through the crisis.

Free cash flow is quite healthy and price to operating cash flow is one of the lowest among it peers.

Conclusion

Goodyears income and cash flow are quite variable from year to year. This makes the projected cash flow method of valuation useful. The GuruFocus-indicated projected free cash flow value of roughly $26 could be achieved within three years. I think this is a good opportunity for patient value investors to pick up this stock and wait for it to recover with the economy.

Disclosure: The author does not have a position in Goodyear at the time of writing, but is considering a long position.

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