3 Reasons To Buy Goodyear Tire While The Stock Is Still Cheap

Apr. 4.12 | About: Goodyear Tire (GT)

The stock market has seen exceptional gains in the first few months of 2012. Many investors believe that we will see another correction in the coming months, and they plan to heed the old adage "Sell in May and go away." Last year, investors who sold in May and "went away" on their summer vacations did much better than those who held on to equities as the market saw a sharp correction in mid-2011. With so many investors believing this pattern will repeat this year, there is a good chance that it won't. Whether we see continued market gains or another correction, it probably makes sense to focus on stocks that still offer value and seek out those that have lagged in the recent rally.

Goodyear Tire (GT) shares have dropped and now appear to offer considerable value to longer-term investors. Goodyear is the world-famous manufacturer of tires for cars, trucks and aircraft. It also owns other well-known brands such as Dunlop, and the company operates about 1,500 auto service centers. Goodyear has faced challenges that include concerns about pension liabilities, and, like many manufacturers, it experienced some operational disruptions when massive flooding occurred in Thailand a couple of months ago. The pension concerns appear overblown and possibly already priced into the stock. The Thai floods are only going to have a limited short-term impact on the company. That leaves investors with a stock that appears quite undervalued when considering many metrics. Here are three reasons why investors should consider Goodyear now:

  1. The price of oil has stabilized and even started to decline from recent highs. Since oil is a significant factor and expense in producing rubber and shipping tires, lower oil prices will be a great benefit for Goodyear. Lower oil prices also tend to boost auto sales and allow consumers to spend money on replacement tires rather than filling their gas tanks.
  2. U.S. auto sales are strong. Recent data indicate that U.S. auto makers saw a 12.7% rise in March auto sales. What is even more significant is that this is the best quarter for the industry since the first quarter of 2008, which was just before the financial crisis hit the economy. The uptrend in auto sales is very bullish for tire makers like Goodyear.
  3. Goodyear shares are priced at around 4.5 times forward earnings. The average stock in the S&P 500 trades at a price-to-earnings ratio of over 12 times. Even when compared to other auto sector stocks, Goodyear appears deeply undervalued. For example, Ford Motor (F) currently trades around $12.64 per share. Ford shares also look undervalued and have plenty of upside; however, Ford shares make Goodyear look even cheaper. For example, Ford shares trade for about 8.5 times 2012 earnings and around 7.3 times 2013 earnings, while Goodyear trades for about 6 times 2012 earnings and around 4.5 times 2013 earnings. In other words, Goodyear shares trade for less than Ford, and analysts expect Goodyear to post higher earnings for the next couple of years. With the auto sector showing signs of a significant rebound, investors should consider Goodyear now, before the market fully recognizes this world-class maker of tires.

Here are some key points for Ford:
Current share price: $12.64
52-week range: $9.05 to $16.18
Earnings estimates for 2012: $1.47 per share
Earnings estimates for 2013: $1.71 per share
Annual dividend: 20 cents per share, which yields 1.6%

Here are some key points for Goodyear:
Current share price: $11.20
52-week range: $8.53 to $18.83
Earnings estimates for 2012: $1.83 per share
Earnings estimates for 2013: $2.54 per share
Annual dividend: None

Data sourced from Yahoo Finance. No guarantees or representations are made.

Disclosure: I am long F, GT.

Disclaimer: 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.