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Goodyear: A Better Stock Than Ford (F) and General Motors (GM)

The Goodyear Tire & Rubber Company (NYSE:GT) isn’t getting a lot of respect this year. The stock is down 19% while the S&P 500 index has climbed over 10%, partly because the company’s core business has suffered and partly because of the rising dollar. Hedge funds, however, got more optimistic on The Goodyear Tire & Rubber Company in the first quarter of the year. Adage Capital Management initiated a position of 1.5 million shares, and two big names in the hedge fund community which had owned the stock at the beginning of the year increased their holdings. David Tepper’s Appaloosa Management reported 8.7 million shares of stock, up 43% (see David Tepper’s stock picks) and SAC Capital Advisors, managed by Steven Cohen, went from a very small position to owning 4.9 million shares (check out Steven Cohen’s favorite stocks).

APPALOOSA MANAGEMENT LP

The company’s report for the second quarter of 2012 was a positive note, but failed to do much to reverse the stock’s decline.  The Goodyear Tire & Rubber Company (NYSE:GT) saw its revenue fall 9% compared to the second quarter of 2011, but successful cost cutting caused net income to approximately double. The decline in revenue was driven by EMEA and Latin America- revenue in North America actually increased- and EMEA also dragged down the company’s operating income. In both of these cases a large part of the decline has been driven by changes in currency values (a rising dollar reduces the dollar value of profits denominated in other currencies). For the first six months of the year these trends have driven declines in both revenue and in net income.

However, sell-side analysts are confident that Goodyear will rebound. The falling stock price and macro factors have resulted in a trailing price-to-earnings ratio of 12, but given earnings estimates from analysts for 2013 the forward P/E is only 5. Going out further, the five-year PEG ratio is 0.1. The company has plenty of cash on its balance sheet and only trades at an EV/EBITDA multiple of 3.5. As a result the stock is priced for value as long as the business does not decline too precipitously. However, investors might note the beta of 2.2 and avoid the stock if they are bearish on the broader market or have too much exposure to it already through the rest of their portfolio.

Goodyear’s closest peer is Cooper Tire & Rubber (NYSE:CTB), a smaller company with a market capitalization of $1.2 billion compared to Goodyear’s $2.9 billion. Cooper focuses on replacement tires and also trades at low valuation multiples: on a forward basis the P/E ratio is 7, though the five-year PEG is 1. Cooper does pay a dividend yield of 2.3% and so might be a better choice if that factor is important, but if the prices are similar or even better in the market leader’s favor, we would lean toward the market leader and that’s Goodyear here. But we’d also suggest that investors consider Goodyear as a cheap way to invest in a rise in driving miles in the U.S. (responsible for half the company’s revenue) and/or Europe. Whether consumers buy a new car (“original equipment” in Goodyear’s terminology) or continue using an old car as part of a deleveraging financial plan and need to replace the tires (“consumer replacement”)  the company makes money either way. General Motors Company (NYSE:GM) trades at a forward P/E of 5 and Ford Motor Company (NYSE:F) has a forward P/E of 6, but both depend on rising demand for new cars. Goodyear would also benefit from this outcome (though not as much as the manufacturers), and would also benefit from a scenario in which driving picks up but consumers choose to stick with their current cars and just replace any parts which wear out. And while the forward P/E multiples are similar, in terms of PEG ratios the auto manufacturers aren’t even close to Goodyear Tire & Rubber Company (NYSE:GT). Therefore, we see Goodyear as having potentially a lower upside, but being more likely to achieve that upside than Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM).

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