Goodyear Tire Starting To Burn Some Rubber

Nov.15.11 | About: Goodyear Tire (GT)

Back in May of this year I wrote an article on Goodyear Tire & Rubber Company (NASDAQ:GT) and in that article I wrote: “Last week Goodyear’s results provided further momentum that the Akron, OH, based tire and chemical supplier is on the right road to recovery. Strength in the tire giant’s home market of North America was evident as all four of the company’s global regions set quarterly records.” And based upon the tire giant’s latest results, the conglomerate rubber brand is starting to burn some rubber!

Goodyear recently announced its third quarter results the Akron, Ohio tire maker reported earnings of $195 million ($.72 a share), up from $.13 a year earlier. Revenue rose 22% , to $6.1 billion, as sales of high-end specialty tires boosted revenue per tire 18%. For Goodyear, growth is clearly being generated by successful differentiation as explained by the company’s CEO, Rich Kramer, “We are seeing a lot of growth in higher value-added markets. Not everybody can make those tires. For us, that means probably the biggest opportunity we’ve had for 40 years.”

Goodyear’s strategic advantages are most evident with its North American business model. The tire king’s market share in the U.S. is around 40% and because of its pricing power, the U.S. division has been able to command higher price increases. In October, Goodyear spiked its commercial tire prices by 10% and the iconic brand has also increased its strategic focus on high-performance tires. Goodyear, Bridgestone, and Michelin collectively command a 55% global market share on tires. Collectively, Goodyear’s strategically aimed differentiators have boosted the company’s bottom line and its sound tire (and chemical) strategy makes for continued sustainability and performance.

The Balance Sheet

Good year continues to improve its balance sheet. During the first nine months of this year the company contributed around $149 million its pension plan. At the end of 2010, Goodyear’s pension was underfunded by around $2.5 billion; however, management states that the pension repayment schedule should be reduced considerably by the end of 2013. If that time table is met, Goodyear could improve its credit-rating (now S&P B+) to investment grade status (S&P: BBB- or higher).

Burning Some Rubber

As of the third quarter, Goodyear had around $2.1 billion in cash and around $6 billion in long-term debt (source Goodyear’s 8K). The considerable debt level is still well above moderate “margin of safety” levels; however, the recent third quarter results and continued success and growth in product differentiation make Goodyear Tire an attractive investment choice. The Goodyear shares are trading at $ 13.92 per share and the company’s PE is 6.8. Wall Street sees earnings growth of around 36% in 2012 and 27% in 2013. With continued growth (globally) and strategically executed balance sheet management, Goodyear is likely to command a $22 price target (5 to 6 times EBITDA). The global 113 year old tire king should continue to pave the way for sustainable growth and continue burning some rubber!

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.