The Goodyear Tire & Rubber Company (GT), Bridgestone Corp (ADR) (BRDCY), Continental AG (ADR) (CTTAY): Kicking The Tires

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Tire producers have been performing well lately. Since April, The Goodyear Tire & Rubber Company (NASDAQ:GT) is up 57.7%, while Bridgestone Corp (ADR) (OTCMKTS:BRDCY),  is up 40% YoY. Germany’s blue-chip index, the DAX, gained 29% in 2012; a company that receives approximately 30% of its revenue from selling tires, Continental AG (ADR) (OTCMKTS:CTTAY), gained 82% that year and was the index’s best performer. Buying any one of these stocks six months ago would have produced solid results.

The Goodyear Tire & Rubber Company (NASDAQ:GT)

Are they cheap based on past averages?

All three companies have long histories. Bridgestone Corp (ADR) (OTCMKTS:BRDCY), the youngest, is 82 years old, while Continental AG (ADR) (OTCMKTS:CTTAY) and The Goodyear Tire & Rubber Company (NASDAQ:GT) both began doing business in the 19th century. All three companies also appear expensive relative to their profits from the past few years.

  Bridgestone     Goodyear      Continental   
Market Cap:         $27B     $4.6B        $32B
Revenue (2012):      $30.85B     $21B      $43.75B
Revenue 4 year CAGR:       Decline      1.9%         7.8%
P/E Ratio*:         38.1      25.2         25.4
Net Profit Margin (TTM):         6.9%     1.75%         6.5%

*Using 3 year average normalized, diluted earnings

While it isn’t a perfect indicator, a company’s price relative to its 3 year average diluted net income can still be very informative. A P/E ratio of over 25 doesn’t always signal an expensive stock. But suppose a company has barely been growing revenues for the past 4 years, with margins under 10%. Buying a company with low margins, low revenue growth, and a P/E ratio over 25 doesn’t usually produce great results.

How do the balance sheets look

An exceptional amount of balance sheet value could still make one of these companies a solid buy at current prices–but do any of these companies have that?

   Bridgestone       Goodyear       Continental   
Working Capital:        $7.5B      $3.18B      ($806M)
Share Price:        $67.64      $18.84       $160.02
Tangible Book Value Per Share:        $39.8     Negative       $13.91
Total Debt To Equity:           0.4         9.1           1.1
 Equity:       $16.2B      $715M       $11.7B

The Goodyear Tire & Rubber Company (NASDAQ:GT)’s massive $6.53 billion debt load is equal to 142% of its market cap. Said debt is also far larger than Goodyear’s sliver of equity, which would not exist without its intangible assets. Goodyear may have the lowest P/E ratio of this group, which is still pretty high, but it has the lowest margin by far, and its balance sheet is by far the weakest.

Continental AG (ADR) (OTCMKTS:CTTAY) is very expensive relative to its tangible book value, although the company isn’t overburdened with debt. It isn’t a bad buy based on its high tangible book ratio alone, though.

With the lowest debt to equity ratio and the most tangible book value per share, Bridgestone Corp (ADR) (OTCMKTS:BRDCY) has the strongest balance sheet among these companies. The difference between Bridgestone’s equity, which includes $400 million of intangible assets, and its market price is still $10.8 billion.

What’s the potential for earnings growth

At Bridgestone Corp (ADR) (OTCMKTS:BRDCY) and The Goodyear Tire & Rubber Company (NASDAQ:GT), tire sales comprise 84% of revenues. Sales declined between 2010 and 2012 in all four of Goodyear’s major geographical segments. Bridgestone also has four geographical segments–since 2010 the company’s domestic sales have been relatively flat, sales in Europe have surprisingly not declined, and sales to the Americas have increased slightly.

Bridgestone Corp (ADR) (OTCMKTS:BRDCY) managed to grow revenues by 14.5% between 1H 2012 and 1H 2013, and also grew net income by 56% during that period. The company’s CEO believes the tire market will only continue to become more fiercely competitive, putting pressure on the company. Bridgestone does have the best margins and sales among tire-makers. Recent results suggest the company will maintain that status.

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