With the optimism in the tire industry, companies dealing in tire and rubber are having good times, and Goodyear Tire & Rubber (GT, Financial) is no exception. The company is pleased to deliver solid results in the fourth quarter. The company’s shares also soared high gaining much in the last year. Goodyear’s performance was also supported by a growing U.S. economy as well as a strengthening U.S. dollar. Goodyear is now optimistic about its better performance in coming quarters as it is seeing some bright spots in the way. In addition, Goodyear will be laser focusing on various strategic initiatives that can benefit it in the long term as well. Let us zoom in to some key areas.
Making smart moves
Goodyear can be a strong long-term holding if it continues to deliver this kind of performance. But the journey doesn’t seem easy for Goodyear as it is prone to certain headwinds. Among the international markets, it is worried about the weak performance in Brazil where, due to a tight economy and conservative financing options, customers’ buying potential has been affected.
This is a key reason for declining sales in Brazil. But Goodyear is putting in efforts to bring back its lost ground and for this, it is focusing on achieving low raw material costs which will create a competitive edge for it in the market. Moreover, Goodyear can also be hurt by the foreign currency fluctuations that might hurt its segment margins. But these seem to be short-term crunches, and Goodyear remains confident about an upbeat performance in the coming fiscal year.
Besides headwinds, Goodyear has other growth initiators which can offset the negative effect of the headwinds. The company, under its strategic moves, will be focusing on improving the performance in the weaker markets. However, due to tight market conditions the company is expecting only a marginal growth overall; still it is confident that its relentless focus on strategic initiatives will lead to profitable results.
Innovative moves to drive business
To grow its sales, Goodyear is focusing on innovations that will help it to meet the customers’ needs. Also, the company is well positioned to make significant investments in its high-valued products that will differentiate the company in the market. In this regard, Goodyear is aiming at becoming more efficient by focusing on supply chain, reducing costs, etc.
This will loosen the financing of vehicles as the interest rates are expected to decline. This will ramp up the demand for vehicles, giving Goodyear great opportunities of good performance in future. Foreseeing this, it is expecting its new manufacturing plant for Latin America and North America to come online in 2017.
Conclusion
The stock looks cheap with a trailing P/E of 13.61 while the earnings growth is steady in the near term with a forward P/E of 8.05. A profit margin of 3.00% is also decent at these valuation levels. As the tire industry is expected to grow well in the coming fiscal year, the stock can be a good long term holding as its earnings are growing for the next five years at a CAGR of 11.00% which is marginally better than the industry average of 10.00%. So, considering all these facts, I would like to say that Goodyear is definitely a good pick, worth your dollars.
