Goodyear Tire & Rubber Co. (NASDAQ:GT) engages in the development, manufacture, distribution, and sale of tires. The company was founded in 1898 and is headquartered in Akron, OH.
Goodyear Tire & Rubber Co's stock is trading at $14, as of 21 Mar 2022, and is down by 35% year-to-date (YTD). Over the past 12 months, the stock is down by 17%, whilst the S&P 500 is up by 13%, which means the stock has underperformed the broader market approximately 30% over this period.
But what do the underlying trends and fundamentals at Goodyear Tire & Rubber Co tell us about its potential as a long-term investment?
Why are fundamental metrics important?
Over the long term, the price of a company's stock is usually tied to its fundamentals, and it therefore makes sense to start by looking at a company's fundamentals when we are considering if it has the makings of a good long-term investment.
‘Fundamentals’ are a set of key metrics which can help you, as an investor, assess the financial health of an organization as well as its growth prospects.
There are a number of fundamental metrics to look at, but the ones we'll focus on are price to earnings ratio (P/E ratio), earnings per share (EPS), price to book value (P/BV) and debt. When they are analyzed together, these metrics can start to 'paint the picture' and help you understand if a company is a solid investment.
With this in mind, let's take a look at Goodyear Tire & Rubber Co’s fundamentals and see if they can tell us anything about the company’s potential as an investment opportunity.
Goodyear Tire & Rubber Co's fundamentals
A good place to start is to look at the EPS, which tells us how profitable a company is on a 'per share' basis. This metric is calculated by taking a company's net income (after dividends on preferred stock) and dividing this by the number of outstanding shares.
Based on its most recent financial statements, Goodyear Tire & Rubber Co's EPS is 2.9, and year-on-year, this grew by 154%, which is encouraging.
Analyzing a company's price to earnings (P/E) ratio is also helpful to tell us how cheap or expensive a stock is, or how much of a premium investors are willing to pay for its earnings. It is calculated by taking the price of a stock and dividing this by the EPS. A higher ratio suggests that the stock is expensive in relation to its earnings, and a lower ratio indicates the opposite.
Based on its most recent financial statements, GT has a P/E ratio of 4.9. This is 54% lower than the average P/E ratio across the industry benchmark, which is 10.7, indicating that the stock is relatively inexpensive in relation to how much it earns.
We also like to look at a company's price to book value (P/BV), which tells us how much investors are willing to pay for a company's assets. It is calculated by the company's stock price divided by its net assets (or 'book value', meaning the value of all assets which appear 'in its book'). P/BV is used by value investors to identify potential investments, and a P/BV of 1 is usually considered a solid investment.
Based on its most recent financial statements, Goodyear Tire & Rubber Co's P/BV is 0.8, which is 57% lower than the industry benchmark of 1.9.
Finally, it's always worth looking at a company's debt profile before deciding to invest in order to assess the risk. A high amount of debt can be a problem if a company is not generating enough cash flow to service its debt, and some sectors rely on debt more heavily than others.
According to its most recent financial statements, Goodyear Tire & Rubber Co has total debt of $8420M, and this has gone down by 23% over the past year. The company also has cash & short-term investments totalling $1164M on-hand, giving it a 'net debt' of $7256M.
Based on these figures, there's no denying that Goodyear Tire & Rubber Co's current levels of net debt are a bit higher than we would like to see.
The bottom line on Goodyear Tire & Rubber Co's stock
All in all, when we looked at the underlying trends at Goodyear Tire & Rubber Co, we found that they paint a mixed picture in terms of the company’s long-term outlook.
On the one hand, the stock is down by 35% YTD and down by 17% over the past year, which is worrying. However, the company is showing positive EPS growth y/y, and has a lower P/E ratio and lower P B/V compared to competitors within the same industry. This gives us some reasons for optimism that its long-term outlook might be better than its recent price movements suggest.
With this in mind, we think that Goodyear Tire & Rubber Co is one for the watchlist.
Keep in mind that this analysis is general in nature. No single ratio or number will give you all of the information you need, and they must be weighed along with other considerations. Please conduct your own due diligence before deciding to invest.
