Goodyear Increases Dividend 20%, But Is It A Buy Right Now?

Jul.16.14 | About: Goodyear Tire (GT)

Summary

I believe the stock to be undervalued when compared to 2015 estimates, while operating in an industry which is hot.

Management knows how to manage shareholders' equity, with a value of 72.2%.

The company is set to report earnings in a couple of weeks.

The last time I wrote about PepsiCo Inc. (NYSE:PEP), I was made fun of because I stated, "Fundamentally I believe Pepsi to be fairly valued based on next year's earnings but expensively valued on earnings growth potential, which is the main reason why I didn't really like the stock anymore. Whereas Goodyear is extremely undervalued on 2015 earnings estimates, earnings growth potential, and has almost double the earnings growth expectations. Financially I'm losing quite a bit of dividend but Goodyear has better financial efficiency management ratios." At the time of writing that article, I wanted to get into Goodyear (NYSE:GT), and the only consumer stock I felt I could rotate out of at the time was Pepsi. Since the article has been published, Goodyear has proceeded to move higher to the tune of 11.94% versus the 4.26% gain the S&P 500 (NYSEARCA:SPY) posted. Goodyear develops, manufactures, and markets tires. I know, I know, there's nothing exciting about the business. At that time, I loved the auto industry; I was already in General Motors (NYSE:GM), but wanted to add a downstream play to the auto industry.

On April 29, 2014, the company reported first-quarter earnings of $0.56 per share, which missed the consensus of analysts' estimates by $0.04. In the past year, the company's stock is up 66.57% excluding dividends (up 67.2% including dividends), and is beating the S&P 500, which has gained 17.44% in the same time frame. Since initiating my position back on May 20, 2014, I'm up 11.64%. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if right now is a good time to purchase more of the stock for the consumer goods sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 15.19, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future, as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 8.51 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $3.25 per share, and I'd consider the stock inexpensive until about $49. The 1-year PEG ratio (1.19), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced, based on a 1-year EPS growth rate of 12.77%. The company has great near-term future earnings growth potential, with a projected EPS growth rate of 12.77%.

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity, and investment. The company pays a dividend of 0.72% with a payout ratio of 11% of trailing 12-month earnings, while sporting return on assets, equity, and investment values of 3%, 72.2%, and 15.4%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 0.72% yield of this company alone is good enough for me to take shelter in for the time being.

The really high return on equity value (72.2%) is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company, to that of other companies in the same industry [for comparison purposes, Goodyear has the highest ROE of all companies in the rubber and plastics industry, ahead of China XD Plastics Company Ltd. (NASDAQ:CXDC), which sports an ROE of 31.2%, and Carlisle Companies Inc. (NYSE:CSL), which sports an ROE of 13.9%].

Technicals

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Looking first at the relative strength index chart [RSI] at the top, I see the stock muddling around in middle-ground territory, with a current value of 55.81. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line, with the divergence bars increasing in height. If the black line can cross above the red line, I believe this stock can explode with some upside. As for the stock price itself ($27.65), I'm looking at $28.61 to act as resistance and $27.06 to act as support, for a risk/reward ratio which plays out to be -2.13% to 3.47%.

Upcoming Earnings Report

Goodyear has proven to be a pretty good investment thus far, and is set to report earnings on the 30th of July before the market opens. Of the 8 analysts covering the company, the mean estimate for the quarter is $0.79, with a high of $0.91 and low of $0.67. Last year's second-quarter earnings were $0.76, so analysts are expecting a 4% increase. Revenue estimates are coming in at $4.74 billion, with a low estimate of $4.57 billion and a high estimate of $4.9 billion. The company has surprised on earnings three times out of three, with a minimum beat of 1.5% and a maximum beat of 58.3%. As you can see, this is definitely a company that knows how to execute of late.

Conclusion

The company recently raised its dividend by 20% to $0.06 per share, with an ex-date of 30th July, '14 and a pay date of 2nd September, '14, for a forward yield of 0.86%. Yes, the dividend is tiny, but has tons of room to grow, along with capital gains, which more than make up for the dividend. Fundamentally, I believe the stock to be inexpensively valued on next year's earnings estimates but fairly valued on earnings growth expectations, while sporting great near-term earnings growth expectations. Financially, the dividend is tiny but has lots of room to grow, and management knows how to handle shareholders' equity. On a technical basis, the stock seems like it can have a bit of upside but may have strong resistance at around $28. I like the stock, but will wait until earnings are reported to decide on purchasing another batch.

Because I swapped out Pepsi for Goodyear in my dividend portfolio, it is only fair that I provide an update from the swap-out date. From May 20, 2014, Goodyear is up 10.82%, while Pepsi is up 4.92% and the S&P 500 is up 4.67%. The trade has worked pretty well so far, let us see how this quarterly report turns out. I still like the prospects of Goodyear over Pepsi for now, and will continue to provide updates.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: The author is long GT, SPY, GM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.