Goodyear Tire Has Done A Great Job Reducing Debt

| About: Goodyear Tire (GT)

Summary

Goodyear is paying down debt and has received an increase in its credit rating.

Several bonds yield well over 4%.

Cost of goods sold should decrease with lower oil and rubber prices.

Goodyear Tire (NYSE:GT) has done a good job of decreasing its debt. Its bonds are a little more investment worthy than last year.

As of the latest quarter, cash was $1.6 billion and accounts receivable $2.48 billion. Cash is down $523 million from the same quarter last year and accounts receivable up $350 million. Accounts payable are $2.6 billion, "other liabilities" $904 million, short-term debt $321 million, and $5.7 billion in long-term debt. Accounts payable have improved by $206 million, "other liabilities" improved by $52 million, short-term debt increased by $173 million, and long-term debt improved by $470 million. I like that improvement in less long-term debt.

According to the 10-K, "The raw materials costs to which our operations are principally exposed include the cost of natural rubber, synthetic rubber, carbon black, fabrics, steel cord and other petrochemical-based commodities. Approximately two-thirds of our raw materials are oil-based derivatives, the cost of which may be affected by fluctuations in the price of oil. We currently do not hedge commodity prices." Impressive. Oil and rubber are both down in cost. Perhaps that should give nice tailwinds to increase margins. Increased margins and free cash flow can be used to pay off more debt.

Cost of goods sold were 81% in 2012. In 2014, COGS improved to 76.7%. It may be even better in 2015. Free cash flow was negative $614 million in 2014, negative $230 million in 2013, and negative $89 million in 2012. Going to need some improvement there.

A series (Cusip: 382550BA8) of bonds yields 4.45% and matures 8/15/20. It is BB rated by S&P. Another series (Cusip: 382550BC4) yields 4.385% and matures 5/15/22. Another series (Cusip: 382550BD2) yields 4.584% and matures 3/1/21. You can find data on these bonds at FINRA's web site.

Moody's increased Goodyear's credit rating from to Ba2 from Ba3. According to a press release, "The upgrade of Goodyear's Corporate Family Rating to Ba2 reflects the company's ongoing pace of overall improving segment operating income (SOI) supported by sustained cost saving actions and low raw material costs."

I like to see a company paying down debt. So many companies that I follow with high amounts of debt waste cash on stock buybacks and M&A. I wouldn't buy Goodyear's debt just yet. Personally, I'm just not comfortable at this point. I've seen their bonds in my searches for a long time but haven't done an analysis until this report. If Goodyear stays on this trajectory, receiving 4.5% on some of these issues beats the 1.5% T-Bills offer.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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