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Bull of the Day: Goodyear Tire and Rubber Company (GT)

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Goodyear Tire and Rubber Company (GT - Free Report) is a Zacks Rank #1 (Strong Buy) that is one of the largest tire manufacturing companies in the world.Goodyear sells tires, undertakes automotive repairs and provides other services.

The company is firing on all cylinders as earnings haven’t missed since the COVID crash. The stock is up 300% from those lows, but is still off almost 50% from the 2017 highs.

Investors are now looking at this stock to see if the continued momentum can continue into 2022. While those all-time highs might be a far way off, the stock is looking very attractive to the bulls from both the fundamental and technical aspects.

About the Company

Goodyear is headquartered in Akron, Ohio and employs over 62,000 people. The company was founded in 1898 and sells its products worldwide through a network of independent dealers, regional distributors, retail outlets, and retailers.

It manufactures products in 47 facilities across 21 countries, selling under popular brands like Goodyear, Kelly, Dunlop, Fulda, Debica, Sava and various other house brands.

Goodyear is a global company, with North America generating 53% of their business. Asia-Pacific is about 15%, while the Europe, Middle East and Africa segment is 32%.

GT is valued at $5.3 billion and has a Forward PE of 10. The company holds a Zacks Style Score of “A” in Momentum and “B” Value. The stock pays no dividend.  

Earnings Beat

In early November, the company reported its sixth straight earnings beat. Q3 came in at $0.72, which was 213% above expectations. Revenue came in at $4.93B v the $3.47B last year.

Tire unit volumes were up 32% year over year, while replacement tire shipments were up 44% y/y. Original equipment volume was off 7% y/y, but total segment operating margin was 7.5%, which is almost back to the 7.7% in 2019.

Management credited freight volume as a reason for the great results. CEO Richard Kramer had the following comments:

"With the transportation industry moving record freight volume, we also saw robust demand from our largest commercial customers. As a result, our commercial business delivered another strong quarter, with fleet tire volume well above pre-pandemic levels."

Goodyear also commented on their recent Cooper Tire transaction. They expect to continue to “deliver significant, immediate and long-term financial benefits as a result of the business combination”. They see $250 million in run-rate synergies by mid-2023 and will realize $20 million of those savings in 2021. The acquisition is expected to reduce Goodyear’s cash tax payments.

Goodyear is looking for markets to stabilize in Q4, but added that inflationary cost pressures will continue. Despite that they affirmed FY21 capex of $1B and guided Q4 volume similar to Q3 2019.

Estimates Rising

Analysts have been fairly aggressive in raising estimates for the current year and for next year.

Over the last 60 days, the current year has seen a tick higher from $1.05 to $1.85, or 76%. For 2022, we have seen a 35% rise over that same time frame, from $2.05 to $2.77.

Analysts are taking price targets higher as well. Since earnings we have seen Deutsche Bank raise the stock to a Buy with a $32 price target. Additionally, Citigroup reiterated its Neutral stance, but raised their target to $24, from $20.

The Technical Take

The stock is well off those COVID lows from March of 2020. Over the last six months the stock has ranged between $14 and $25. The 61.8% Fibonacci retracement is the $18 area, which recently showed support. Additionally, the 200-day is just above that $18 level, making this support area a big buy zone for the bulls.

The stock has bounced off those support levels and will now make a run to its 50-day moving average at $21. From there, the bulls will need to break the $22.50 area and we could see an accelerated move to 2021 highs and to the $27 area where the Fib extension targets reside. This setup gives a trader a good risk reward against those recent lows.  

In Summary

Goodyear has a lot of earnings momentum with the freight volume continuing to be strong. Additionally, the technical setup currently in place gives traders and investors a great risk/reward scenario.

Earnings will be in early February and should be the next big catalyst that could take the stock higher. If the positive earnings scenario plays out, look for strong returns in 2022.


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