GT is super-undervalued; is it time to buy?

June 11, 2018

GT is super-undervalued; is it time to buy?

Before the beginning of 2018, finding stocks that you could really call undervalued in any kind of realistic sense was becoming more and more difficult, simply because the broad market had been following a nearly uninterrupted upward trajectory since 2012, extending the bull market in the United States into a ninth year. Since that point, there has been a lot of uncertainty in the market, driven by geopolitical concerns, such as a trade war between the U.S. and its largest trade partners, rising interest rates and worries about accelerating inflation. That has driven a lot of stocks in the market down to levels that would make any value-oriented investor start to pay closer attention. GT fits into that category; after hitting a peak at nearly $35 per share in late January, the stock tumbled more than $10 per share at its lowest point, reached just last week. That’s a decline of more than 28% since the end of January until late last week.

Of course, the mere fact that a stock is trading at a discount relative to historical highs isn’t enough by itself to say that the time is right to jump back in. Stocks that get beat down to extreme lows often have good reasons for investors to treat them that way; sometimes there are really critical problems at the business that make the stock’s higher price levels completely unreasonable. GT’s story doesn’t fit exactly into the picture I’ve just described, and truthfully there are some important external factors at play, like tariffs on autos imported from Mexico, Canada and the European Union, as well as higher crude prices, that I expect could continue to keep pressure on the stock in the near term; at the same time, however I think there is an interesting argument to make right now about this stock as a good value-oriented opportunity.

It’s important to note that while concerns about things like tariffs and increasing crude costs might impact companies like GT in the long term, nothing is certain. Even now what impact tariffs will actually have, and whether they will hold on a long-term basis remains to be seen. While these are issues to be aware of and worth paying continued attention to, they also shouldn’t discourage you from considering the stock as a good investing opportunity if the right conditions show themselves.

Fundamental and Value Profile

The Goodyear Tire & Rubber Company (GT) is a manufacturer of tires. The Company operates through three segments. The Americas segment develops, manufactures, distributes and sells tires and related products and services in North, Central and South America, and sells tires to various export markets. The Americas segment manufactures and sells tires for automobiles, trucks, buses, earthmoving, mining and industrial equipment, aircraft and for various other applications. The Europe, the Middle East and Africa (EMEA) segment develops, manufactures, distributes and sells tires for automobiles, trucks, buses, aircraft, motorcycles, and earthmoving, mining and industrial equipment throughout EMEA under the Goodyear, Dunlop, Debica, Sava and Fulda brands. The Asia Pacific segment develops, manufactures, distributes and sells tires for automobiles, trucks, aircraft, farm, and earthmoving, mining and industrial equipment throughout the Asia Pacific region, and sells tires to various export markets. GT’s market cap is $6.1 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings decreased by a little over 32%, while sales grew slightly.
  • Free Cash Flow: Free Cash Flow is healthy, at a little over $200 million over the past twelve months. This number has declined since late 2015 when it peaked at about $1 billion.
  • Debt to Equity: the company’s debt to equity ratio is 1.13, which is a little above what is normally considered desirable; however their balance sheet indicates operating earnings are more than sufficient to service their debt. Cash and liquid assets are also healthy and translate to a cash yield of more than 10%.
  • Dividend: GT pays an annual dividend of $.56 per share, which translates to an annual yield of 2.18% at the stock’s current price.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for GT is $20.69 per share. At the stock’s current price, that translates to a Price/Book Ratio of 1.23. The Media industry’s average is 1.9, while their historical average is 2.375. If you use the industry average as a more conservative long-term target, the stock could rise to about $39 per share, which is above its highest point in almost 20 years.

Technical Profile

Here’s a look at the stock’s latest technical chart.

  • Current Price Action: Over the last week or so, GT found support at around $24 per share and has bounced a little bit from that point. The stock has been under a lot of pressure since late January, with the biggest drop occurring in February, after which the stock’s downward trend began to decelerate a bit. The current support level looks like it could mark trend support for the time being, while the stock’s pivot high in mid-may a little above $26 is the most likely next resistance point.
  • Trends and Pivots: The red diagonal line represents the stock’s intermediate-term trend, which is clearly down. In the last couple of days the stock has broken above that line and appears to be building some good bullish momentum. The solid, horizontal green line represents the stock’s most immediate support level, which is a little above $24, and the dotted red line marks where I think the stock is likely to find its next point of resistance, just a bit above $26 per share. If the stock is to truly break the strength of the intermediate-term downward trend, it will need to break above that resistance. I think a move to anywhere from $26.50 to $27 could mark the beginning of that reversal. If the stock breaks down and moves below its current support around $24, it would likely continue to drop to as low as $19, which marks a pivot low point the stock last saw in late 2015.
  • Near-term Keys: Watch the stock’s movement carefully over the next week or so. A move to $26.50 or $27 would mark a big bullish breakout and should give the stock plenty of room to rally into the $30 range and possibly higher; that could offer an attractive bullish trade, either by buying the stock or working with call options. On the other hand, a break below $24 could see the stock drop as low as $19 per share in the near term, which might offer an attractive bearish trade, either by shorting the stock or using put options.

By Thomas Moore Auto Industry Investiv Daily Share: