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The tire industry is well established, and the Goodyear (NASDAQ:GT) brand is one of the most well-known tires. It would be easy for an investor to decide based on the brand strength that the company should be a good investment, but it is very important to determine an intrinsic value of a company to see if it is trading at a good price.

Further, Intelligent Investors need to compare potential investments across industries, in order to determine which is the greatest opportunity for profit. By using a ModernGraham analysis, one can maintain a systematic analysis across companies and even industries to easily compare one potential investment's risk level and opportunity for value against another potential investment. What follows is a specific look at how Goodyear fares in the ModernGraham valuation model.

Defensive and Enterprising Investor Tests:

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 1/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record - has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - FAIL
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

MG Value$33.03
MG OpinionUndervalued
Value Based on 3% Growth$12.44
Value Based on 0% Growth$7.29
Market Implied Growth Rate9.25%
Net Current Asset Value (NCAV)-$30.98
PEmg27.00
Current Ratio1.75
PB Ratio6.01

Balance Sheet - 9/30/2013

Current Assets$9,069,000,000
Current Liabilities$5,184,000,000
Total Debt$6,366,000,000
Total Assets$17,672,000,000
Intangible Assets$798,000,000
Total Liabilities$16,720,000,000
Outstanding Shares247,000,000

Earnings Per Share

2013 (Estimate)$1.94
2012$0.74
2011$1.18
2010-$0.89
2009-$1.55
2008-$0.32
2007$0.65
2006-$1.86
2005$1.21
2004$0.60
2003-$4.58

Earnings Per Share - ModernGraham

2013 (Estimate)$0.86
2012$0.16
2011-$0.15
2010-$0.81
2009-$0.64
2008-$0.10

Conclusion:

Goodyear does not qualify for either the Defensive Investor or the Enterprising Investor. The company has a poor track record when it comes to earnings stability over the last 10 years, a critical requirement of the Defensive Investor that when combined with the company's low current ratio, poor dividend history, and high PEmg and PB ratios, eliminates the company from the Defensive Investor's list. Similarly, the Enterprising Investor is put off by the high debt relative to current assets, and the lack of earnings stability over the last 5 years. As a result, value investors seeking to follow Benjamin Graham's methods may wish to seek other opportunities, such as by reviewing a list of companies that pass the ModernGraham requirements.

The company does fare well solely based on valuation, after growing its EPSmg (normalized earnings) from -$0.64 in 2009 to an estimated $0.86 for 2013. This level of growth more than supports the market's implied growth rate, and results in an intrinsic value that surpasses the price at which the company currently trades. Therefore, the company appears undervalued.

What do you think? What value would you put on Goodyear Tire & Rubber Company? Is there a company you like better?

Disclosure: The author did not hold a position in Goodyear Tire & Rubber Company (GT) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Annual Valuation Of The Goodyear Tire & Rubber Company