Goodyear Could Put Your Portfolio on a Roll
This tire-maker’s earnings growth was driven by more than just cost cutting -- after all, in the second quarter, it reported a 24% sales increase. Here are two reasons to consider investing:
- Very low valuation. Goodyear trades at a Price-Earnings-to-Growth ratio of 0.10 -- 1.0 is fair value – a forward P/E of 4.6 on earnings forecast to grow 46% to $2.23 in 2012 and its price target of $22.17 is over twice its current price.
- Great earnings reports. Goodyear has been able beat analyst’s expectations in all of its past five earnings reports.
- Flat sales and declining cash -- but lower losses and less debt-laden balance sheet. Goodyear sales have remained about the same at $18.8 billion over the last five years while its net loss has declined from -$373 million (2006) to -$216 million (2010). Its debt has fallen -- but its cash has declined faster. Specifically, its long term debt fell at a 10.2% annual rate from $6.6 billion (2006) to $4.3 billion (2010) while its cash dropped at a 15.4% annual rate from $3.9 billion (2006) to $2 billion (2010).
- Under-earning its cost of capital but getting better. Goodyear is earning less than its cost of capital – but it’s getting better. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half of 2011, Goodyear's EVA momentum was 2%, based on first six months’ annualized 2010 revenue of $17.6 billion, and EVA that improved from first six months’ 2010 annualized -$822 million to first six months’ 2011 annualized -$385 million, using a 9% weighted average cost of capital.