Goodyear Tire (GT) is one of the largest tire makers in the world and it is also a famous brand name, thanks in part to the Goodyear Blimp. This company also owns other globally recognized brands like Dunlop and Fulda. It operates a chain of auto service and tire installation centers throughout the United States. Goodyear is the largest tire maker in North America and Latin America and it is the second largest tire maker in Europe. Goodyear shares have been in a solid uptrend throughout most of 2013, but it still looks undervalued and therefore could be poised for further gains in 2014. Significant signs of recovery are starting to emerge in many European countries and with Goodyear's heavy exposure to the region, this could become a positive catalyst for financial results and the stock price in 2014.
Goodyear has been reporting solid financial results. For the third quarter of 2013, it announced revenues of $5 billion and net income of $166 million which is equivalent to 62 cents per share. This was a record for the third quarter and it was a 51% increase from net income of $110 million or 41 cents per share for the same period last year. Consensus analysts' estimates are at $2.52 per share for 2013, and $2.80 per share for 2014. This implies a forward price to earnings ratio of just about 8 times, which is around half the multiple for the S&P 500 Index (SPY). This leaves plenty of room for PE multiple expansion which along with earnings growth could continue to drive the stock sharply higher.
As the chart above shows, Goodyear shares have performed well in 2013. It has paid off to be a buyer of this stock on pullbacks as these shares continue to climb higher. This stock might take time to pause and consolidate on occasion, but the valuation is compelling and the stock appears to have more upside going into 2014. Even a recent pullback from about $23 to $21 has been short-lived as the stock has once again started to climb higher. Again, this appears to be due to the fact that Goodyear shares are undervalued when compared to the rest of the market. Goldman Sachs recently put out a list of the 40 cheapest stocks and Goodyear Tire was included. The stocks on the list were identified by strategist David J. Kostin as being the most undervalued, with each having at least 20% upside.
Potential downside risks include another U.S. or global recession which could negatively impact tire sales. However, the U.S. economy does not appear to be at risk of recession now and with improving growth rates in many parts of Europe, this risk seems even more limited for now. Goodyear has around $2.5 billion in cash on the balance sheet and about $6.54 billion in debt. While this amount of debt could be more of a concern in an economic downturn, it appears reasonable now especially for a company with nearly $20 billion in annual revenues.
In terms of the target price for Goodyear shares, some analysts also appear bullish: On October 26, analysts at Deutsche Bank set a $26 price target. On November 5, analysts at Argus reiterated a buy rating and raised the price target from $22 to $24 per share. In my opinion, their previous target of $22 per share was too low, and the new $24 target also seems too conservative, even though it implies gains of about 10% from current levels. If Goodyear is able to achieve earnings of $2.80 as suggested by analyst estimates, it appears that the stock should be worth at least $28, which would still be a below market price to earnings ratio of 10. In a market full of high-priced stocks, Goodyear shares appear to offer investors a chance to keep climbing a bullish uptrend with a globally-recognized brand, at just around 8 times forward earnings estimates.
Here are some key points for GT:
- Current share price: $22.09
- The 52-week range is $11.83 to $23.40
- Earnings estimates for 2013: $2.52 per share
- Earnings estimates for 2014: $2.80 per share
- Annual dividend: 20 cents per share which yields .9%
Supreme Industries (STS) is a leading maker of truck bodies, buses, armored and specialty vehicles. While some investors might not be familiar with this company, many of them may recognize some of these well-known brands: "Kold King" insulated vans for refrigerated goods. "StarTrans" shuttle buses and trolleys which are often used by municipalities, hotels, resorts, and airports. It also manufactures specialty vehicles which are used in industries like landscaping, and construction.
Supreme reported third quarter earnings of $1.5 million, or 9 cents per share on revenues of $67.3 million. This was down from revenues of $71.7 million and net income of $3.6 million, or 22 cents per share during the same period last year. The decrease was caused in part by delays in the truck division; however, the company made positive statements for improved results in the coming fourth quarter, it stated:
"While we are certainly not satisfied with our overall sales decline in the third quarter, we are very encouraged with strong orders in our truck division during the period. Based on our backlog, we anticipate the fourth quarter will reflect substantially improved shipments over the prior year's comparable quarter barring any unforeseen supply chain chassis issues. We have made good progress on improving on-time deliveries and there are additional opportunities remaining to compress the order-to-cash conversion cycle," said President and CEO Mark Weber.
Based on these statements, it appears that the company should see improved financial results in the current (fourth) quarter and that could be a catalyst for the share price in early 2014. In the meanwhile, the weaker third quarter results have caused a solid pullback in the stock which appears to be a strong buying opportunity. As the chart below shows, this stock has been in an uptrend for most of 2013. It even hit new highs and traded for about $7 per share just before earnings were announced, and it now trades for about $6. As the chart also shows, buying this stock on pullbacks has been a rewarding strategy as it has climbed higher. The recent pullback has put the stock back at a major support level which is indicated by the blue uptrend line. Investors who have bought on pullbacks to this level during the past few months have generally done well and buying near major support levels could reduce downside risks. Overall, this is a beautiful chart and the pullback appears to be an attractive buying opportunity, with the stock currently resting at major support levels.
Potential downside risks include another recession which could strongly impact commercial vehicle sales, however, that risk appears limited at this time with the U.S. economy showing slow but steady growth. Another downside risk to consider before making investments is the balance sheet, but Supreme has a solid balance sheet with minimal debt of less than $16 million. This is very conservative amount of debt for a company with about $270 million in annual revenues.
Commercial truck sales are showing signs of improvement and the industries that buy the type of vehicles which are manufactured by Supreme Industries like hotels, construction, landscaping, and others, are seeing growth in many cases. This should lead to earnings growth for Supreme in the coming years. Analysts expect the company to earn 62 cents per share in 2013, and 72 cents per share for 2014. With the shares trading for just about $6 now, that implies a forward price to earnings ratio of less than 9 times. This appears very undervalued when compared to the S&P 500 Index which trades for about 16 times earnings.
It also looks like a bargain when compared to other companies in the auto and truck sector. For example, Paccar, Inc. (PCAR) which makes heavy duty trucks and trades for nearly $60 per share, is expected to earn about $3.65 per share in 2014. That implies a forward price to earnings ratio of around 16 times, which is about twice the current PE ratio for Supreme. This shows that multiple expansion could be a significant upside catalyst for this stock, and another catalyst could be earnings growth. It is also worth comparing shares of Federal Signal Corp. (FSS) which also makes specialty vehicles like lift equipment, sewer cleaning and vacuum trucks. Analysts expect this company to earn 78 cents per share (which is only 6 cents more than estimates for Supreme in 2014), and yet Federal Signal shares trade at $15 or around 20 times earnings estimates. This is around double the share price and PE multiple for Supreme, which shows the upside potential it holds. The key to reaching full valuation will depend on Supreme's management abilities in producing consistent financial results and earnings growth in the coming quarters. As buying pullbacks in this stock has paid off this year, and with the shares appearing significantly undervalued when compared to the market in general and other companies in this sector, Supreme shares look like a "strong buy" right now.
Here are some key points for STS:
- Current share price: $5.94
- The 52-week range is $2.95 to $7.12
- Earnings estimates for 2013: 62 cents per share
- Earnings estimates for 2014: 72 cents per share
- Annual dividend: No cash dividend, although the company did offer a 5% stock dividend in 2013
Disclaimer: Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.