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Standard & Poor's


11/17/14 10:06:44 AM



This week's Focus Stock of the Week is Goodyear Tire (GT: $25.62), which carries S&P Capital IQ's highest investment recommendation of 5-STARS, or Strong Buy. GT is the largest U.S. tire manufacturer and one of the biggest worldwide. We expect that the company will generate about $18.3 billion in revenues in 2014 and $18.4 billion in 2015. Our recommendation is based on our expectations that GT will benefit from rising global vehicle production, led by growth in the U.S., and increased demand for value added tires. We also believe GT stock has attractive total return potential.

GT holds the leading tire market share in North America, Latin America, China, and India. Sales in the United States accounted for 40% of 2013 revenues, with Germany providing 12%, and other international markets 48%.

Approximately 86% of 2013 sales were from new tires. Sales of chemical products and natural rubber to unaffiliated customers were 4% of sales. The remaining sales were mostly from retail and "other." Replacement tire sales accounted for 69% of 2013 unit shipments, with original equipment tire units the remaining 31%.

We see rising global vehicle production in 2014, as well as flat to slightly rising global demand for tires. We expect increases in both original equipment (OE) tires and replacement tires. We see 6.3% lower revenues for 2014, rebounding to a 0.3% gain in 2015 to $18.4 billion. In 2015, we expect low single-digit gains in overall U.S. volume, while sales may vary widely in different global regions and segments of the markets. We expect unfavorable foreign exchange rates, uncertainty in Venezuela and weakness in demand in some regions to restrain reported sales.

S&P Capital IQ Equity Research forecasts U.S. new light vehicle sales volume will rise 4.9% to 16.3 million units in 2014 and a further 2.0% gain in 2015. J.D. Power & Associates (which, like S&P, is owned by McGraw Hill Financial), projects global new light vehicle sales volume will increase 2.3% in 2014 to 86.3 million unit and 4.0% to 89.8 million units in 2015.

Margins in 2014 should benefit from an improved product mix, expense reductions from restructuring activities, and improved overhead absorption. We believe sharp declines in rubber and other raw material prices will benefit results into 2015. We see reductions in higher cost plant capacity, including the closing of the Amiens plant in France, and a shift to Asia-based production leading to savings. Lower oil and rubber prices have persisted longer than expected and should continue into 2015. Longer term we still expect price volatility, with an upward bias.

After fully funding its U.S. hourly pension plan via a $1.15 billion cash payment in early 2014, we expect a reduction in global pension expense. We look for additional savings from restructuring actions to benefit 2014 and 2015 results. We estimate EPS of $2.90 in 2014 and $3.18 in 2015, up from $2.28 in 2013.

The company does not have major debt due until 2019. With improved liquidity, in September 2014, the company raised its quarterly cash dividend 20% to $0.06 per share. Its share repurchase authorization for 2014-2016 is up to $450 million, including a planned $150 million in the current quarter.

Applying a multiple of 9.4X, based on historical analysis, to our 2015 EPS estimate of $3.18, we derive a 12-month target price of $30 for these volatile shares. Our target multiple at the lower end of GT's historical range reflects long-term risks of higher raw material costs despite current favorable price trends. Despite lower capital spending expected in 2014, cash flow should be negative, after cash contributions to fund Goodyear's pension plan.

A cash dividend adds to total return potential. With our target price of $30, and a recent 0.95% dividend yield, we see approximately a 20% total return potential.

Risks to our opinion and target price include an increase in GT's need for cash, weaker-than-anticipated demand for tires, less-than-expected cost savings, inability to achieve expected price increases, higher-than-projected raw material costs, further weakening of European and other key markets, and unfavorable exchange rates.

S&P Capital IQ's views on stocks are constantly re-evaluated. Please refer to our most recent publication on this stock to see our current view.


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