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Important disclosures appear on the last page of this report.
Consumer Discretionary Recommendation: BUY
Analysts
Bryce Engelbart
Jeremy Dobes
James Savage
Company Overview
Goodyear Tire and Rubber Company is a world leader in the
manufacturing of tire and rubber related products.
Operations are conducted through two main business
channels: Original Equipment and Replacement tires.
Accompanied with an iconic brand name, Goodyear’s scope
of operations reaches to most regions of the world. A
majority of business results from North American
operations while the remainder stems from Europe, Latin
America, and Asia. The firm has manufacturing plants in
22 different countries and employs 69,000(xi). Goodyear
reported a Net Income of 2,452 million dollars for year-end
2014.
Stock Performance Highlights 52 week High $28.98
52 week Low $18.87
Beta Value 1.35
Average Daily Volume 3.67 m
Share Highlights Market Capitalization $7.23 b
Shares Outstanding 690 m
EPS 2014 9.02
P/E Ratio 9.57
Dividend Yield .9%
Dividend Payout Ratio .24%
Company Performance Highlights ROA 13.54%
ROE 73.88%
Sales $18.1b
Operating Income $1.8b
Financial Ratios Current Ratio 1.63
Goodyear Tire and Rubber Company
(NYSE: GT)
Current Price $27.06
Target Price $31.09
GT Exhibits Potential Strength
Drivers to Thesis
Since hitting over $100/barrel in 2014 Q3, oil prices have declined to $56.17/barrel. This low-price
environment has led to individuals driving more which
puts Goodyear in a position to expect increased
replacement revenues. Additionally, the cost of oil-
based inputs has decreased, which we project will
decrease COGS by 5.68% over the next year.
As a firm in the Consumer Discretionary sector, Goodyear is quite sensitive to the health of the market.
Growth in the economy bods will, as the U.S. economy
As the automotive sales continue to climb, Goodyear is positioned itself to experience an increase of revenue
from the original equipment segment, specifically in
domestic and emerging markets.
Fully funded pension plan.
Risks to Thesis
As the U.S. dollar appreciates versus foreign currencies, such as the Euro, we anticipate revenues in these
regions to decrease due to the heighted cost of
importing American goods.
Despite the current low-price environment of input costs, these commodities are still subject to fluctuations
in the long term.
One Year Stock Performance
Figure 1-1
Important disclosures appear on the last page of this report.
Through the use of the discounted cash flow model,
economic profit model, and relative price-to-equity model
we believe that Goodyear is currently undervalued by
14.18%. Thus, we are issuing a BUY suggestion to the
Krause Fund. We believe that the firm is positioned for
growth domestically and increasingly important emerging
markets. As the U.S. economy continues to shift out of the
Great Recession, the American consumer is starting to show
confidence in the economy. This is found evident through
consumption expenditure and consumer confidence
measures. Despite the looming hardships in Europe, we
believe that Goodyear has made wise investments in Asia
and Latin America. Additionally, the firm is positioned to
benefit from the current low-price commodity environment.
Real GDP
Real Gross Domestic Product (GDP) illustrates inflation-
adjusted expansions or contractions in an economy during a
specific time period (ii). Typically expressed year-over-year,
in order to see how the economy is performing compared to
the prior year. Essentially, this broad metric illustrates
health of an economy. GDP is composed of four main
categories; investment, net export, government expenditure,
and consumption (ii). We are specifically concerned with
consumption as it has the ability to gauge discretionary
spending.
As noted in Figure 1-2, 2015 Q1 Real GDP registered a
growth of 2.1% greater than its 2013 counterpart (i). Despite
this economic expansion, it missed a consensus estimate of
2.6% growth. We believe that this disappointing growth
figure had been caused by a deflation scare which stagnated
investments. As Figure 1-1 depicts, consumption has been
at strong levels in the years following the last recession.
Additionally, consumption grew at 4.4% in 2015 Q1
compared to the prior year (i). We project that 2015 Q2 will
register at 2.8%, fueled by confidence in oil prices and an
improving job market.
.
Approximately 70% percent of Goodyear’s domestic
revenue has come from the pocket of American consumers (iii). North American replacement tire segment has
historically have credited for 28.6% of total tires sold (iii).
With that in mind, gauging how the American consumer
will spend allows us to properly project growth in our
replacement tire segment revenue. As the economy
continues to expand, we believe that our North American
revenue projections of 5% average-annualized from 2015
through 2019 and a steady state 2.5% grow is warranted.
Interest Rates/Strong U.S. Dollar
In response to the events of the Great Recession of 2008 the
Federal Reserve, under Ben Bernanke’s direction, put into
place a set of Quantitative Easing policies. These policies
ultimately had an affect on the money supply which, in turn,
lowered interest rates. These lower interest rates aimed to
spur spending amongst consumers. Under current
leadership from Janet Yellen these policies ended in
October 2014. However, quantitative Easing’s affects are
still being felt to this day and as shown in figure 1-3 interest
rates still linger at historical lows (iv). According to
guidance from the Federal Reserve we can expect a rise in
rates coming in the first quarter of 2016 (v).
Lower interest rates by nature provide a lower cost of
borrowing, thus increasing the purchasing power for both
firms and individuals. With the inevitable rise in interest
rates looming within the next year, we have incorporated the
consumer’s marginally increased cost to borrowing into
revenue projections. We do not believe that the initial raise
in rate will be substantial, as the Fed still views the
American economy as fragile. However, we do see rates
increasing by a substantial amount in the long term, which
in turn, will negatively impact our domestic revenues. We
believe a reasonable long term Fed Funds rate will be
approximately 2.00%.
As the domestic central bank aims to raise rates other
entities, such as the European Central Bank, China, and
Australia, plan to lower their respective rates. This raise in
domestic rates coupled with cuts to international rates will
appreciate the value of the U.S. Dollar even further. A
comparatively stronger dollar has two impacts to our model.
Executive Summary
Macroeconomic Outlook
Important disclosures appear on the last page of this report.
First, the international revenue in our model will reflect the
increased costs of importing domestic goods. This
increased cost will lower exports, which we believe will
lower Goodyear’s international revenues, specifically in
Europe. Secondly, we believe that a strong U.S. dollar will
allow Goodyear to improve margins, by reducing costs
spent on raw materials from across domestic borders. We
have represented this sentiment with decreasing the rate at
which COGS increases based on historically averages
during the years of 2015 and 2016.
Inflation
Inflation is gauged by the Consumer Price Index. An
increase in this index reflects an increase in prices. The
Federal Reserve maintains a mandate of keeping inflation at
2%. As noted in figure 1-4, the price of goods in the
economy actually decreased by .1% in March compared to
this time last year (iv). We are not worried of this
deflationary hiccup as the Fed has shown the ability to
achieve this target and we feel confident in their ability to
do so. This confidence in the Fed allows us to keep
inflation at a constant 2% in our model’s forecast.
An increase in inflation will encourage firms and
individuals to consumer today rather than in the future when
prices are perceived to be higher. Our model is impacted in
several ways by inflation. Revenue from both the
replacement and original equipment segment is partially
driven by assumption that prices will rise in the future, thus
encouraging both set of consumers to spend. If that
assumption were to change, due to deflation, we believe our
consumers would stagnate their consumption in order to
cash in on cheaper prices in the future. Additionally,
inflation impacts Goodyear’s decision to purchase inputs or
increase capital expenditures. If we were to lose faith in the
Fed maintaining inflation of 2%, we believe that Goodyear
may hold off capital expenditures.
Despite out assumption that domestic inflation will remain
around a healthy 2%, we are unsure of our European
counterparts. Worries of deflationary trends in Europe will
have an impact on international consumption. Firms
believing that prices are actually on the decline will defer
expenditures today in order to spend at a less costly rate in
the future. It is because of this fear of deflation that we
have projected less revenues from both revenue streams
from the European region in the model during the short
term. We do not see deflation a long term issue in Europe,
thus this inflation effect is absent in our projections beyond
2017.
Employment
Gauged by two metrics: unemployment rate and the
monthly nonfarm payroll survey. During the lowest point of
the prior recession compared to last month end the
unemployment rate has improved from 10 % to nearly half
that rate at 5.5% (v). As shown in figure 1-5, Durable Goods
Manufacturing (Goodyear’s employment base)
unemployment figure is actually less than the aggregate
household survey. As of March 2015, unemployment in
this sector was 4.8% (v).
However, there is a hidden side to the employment numbers
that we would like to highlight: the participation rate.
Participation rate shows those of the total working age
population are actually in the labor force. The participation
rate grants further context to unemployment figures, as we
believe that unemployment numbers look positive because
individuals are simply dropping out of the labor force. We
believe that Janet Yellen and the rest of the Fed look to this
number and may be a variable as to why interest rates still
remain at historical lows.
Employment rates have a strong impact on our model.
Mainly, employment will impact replacement tire segment
revenue; if there are less individuals with jobs, then that
equates to less income to spend on discretionary goods, such
as tires. Additionally, if less individuals do not have jobs to
travel to everyday the turnover on existing tires will take
longer to occur. This would delay revenues in our model.
Disposable Income
Personal Income less taxable income and adjusted for
inflation will equate to Real Disposable Income; portion of
the income that individuals have at their disposable to
spend. The current environment of Real Disposable Income
is quite encouraging. 2014 Q4 observed a 3.6% increase
from the prior quarter.
This metric is an important indicator to our model’s
forecasts, as it provides the slice of income that
discretionary firms, such as Goodyear, hope to translate into
revenue. Additionally, this metric also illustrates the
Important disclosures appear on the last page of this report.
amount of revenue that individuals can spend on new
automobiles or air fare, which in turn feeds more demand
for the original equipment segment.
Industry Overview
The Tire Manufacturing industry is composed of firms that
manufacture tires and tire-related products for motor
vehicles and aircrafts. Finished products find their way to
consumers through two primary channels; original
equipment and replacement. Original equipment channel
funnels to various automobile and aircraft manufacturing
firms that use these finished products as input to create their
own finished product. Replacements channel funnels to
individual consumers through independent retailers and
whole owned retail stores. Estimates show that the industry
grew by .6% in 2014 (vi). Additionally, industry revenue is
estimated to increase by 6.2% by the year 2019 (vi).
Key Metrics
Price of Oil
Oil prices play a role on both sides of the equation;
consumer driving patterns and firm raw material input costs.
On the consumer end, gasoline prices have dropped
substantially over the last two quarters. This low cost of
travel spurs and rise in vehicle miles driven, thus increasing
the demand for replacement tires as older units need to be
replaced. This impacts our model specifically in the
replacement segment revenue. The second role is on the
firm side of the equation. Oil is a key input to
manufacturing tires and tire-related products. With raw
materials inputs contributing to 63.4% of all costs afforded
by tire manufacturers, it would be of no surprise that lower
input costs from oil would benefit a firm’s income
statement. With that in mind, oil prices have a direct effect on our model’s COGS.
The current oil price environment has positioned both
consumers and tire manufacturers to benefit. The last
closing price of WTI oil per barrel was $56.17. We expect
in the short-term for oil prices to remain at current levels.
However, as figure 2-1 projects through the use of WTI oil
future prices, due to tensions in the Middle East and the
looming demise of domestic oil fracking, we believe that oil
prices will raise in the long term to a more moderate price of
approximately $70 a barrel by 2020. We note that looking
to the futures market for price guidance is purely
speculative. However, we believe that this price reflects the
expectations of commodity experts.
Price of Synthetic Rubber We believe it is also important to highlight another key
input for tires and tire-related products: Rubber. The price
of this commodity solely impacts tire manufactures as an
input cost. As stated before, inputs consist of 63.4% of all
costs attributed by tire manufacturers. Historically,
synthetic rubber is a volatile commodity due to trade
fluctuations and weather (specifically in South East Asia).
The current environment for rubber prices has been one that
tire manufactures welcome wholeheartedly. As figure 2-2
depicts, the current synthetic rubber prices register at
$78.72. This price is the result of a slow decline of -71.9%
since peaking in 2011 Q1. This price is highly dependent
on the Chinese economy as the country is the highest
importer of the raw material.
Going forward, we believe that synthetic rubber prices will
continue to stay at its current price for various reasons.
According to commodity experts, there is an expected over
supply of this input material projected for 2020 (vii). These
high inventories are due to the oversupply of the market that
has been caused by a slight stagnation in the Chinese
economy. We believe that due to these high inventories of
rubber that there is a reduced chance that synthetic rubber’s
price will rise due to scarcity. We forecasted the price of
rubber to equate to approximately $62.00 per pound in our
steady state 2020. We feel confident in this number as it
aligns with industry experts.
Total Vehicle Miles
This metric includes the total miles driven by all types of
motor vehicles. As individuals drive more miles, their
existing tires become worn out and need to be replaced. It is
because of this thinking that total vehicle miles impacts the
replacement segment revenue in our model.
Industry Analysis
Important disclosures appear on the last page of this report.
It is imperative to highlight total vehicle mile’s relationship
with oil prices. As shown in figure 2-3, oil prices are
represented through gasoline prices. When gasoline (a
finished good of oil) prices increase total miles driven
decreased as well. Having a pulse on these metric will
allow us to properly gauge replacement segment revenue.
As figure 2-3 depicts, total vehicle miles driven has
increased by 4.89% in March compared to its 2014
counterpart. The current environment of low oil prices and
economic growth bods well for Total Vehicle Miles and in
turn for replacement tire revenue. We project that this
metric will continue to show healthy growth, due to lower
oil prices, more fuel efficient tires, and stable domestic
economic growth.
Automotive Manufacturing Demand of automobiles has a direct impact on the original
equipment business segment for tire manufacturers. As
demand increases for new cars, inputs for those cars will
increase accordingly. Demand for automobiles impacts the
model through original equipment segment revenue.
We believe that demand for automobiles will continue to
grow over the next years for various reasons. Many rates
for auto loans move with the short end of the yield curve.
Currently, the Fed Funds rate is at all-time low. This rate
effective variable interest rates, such as auto lows. We do
not believe these rates will rise until early 2016. We believe
that the eventual increase in rates will not be substantial by
any stretch of the imagination. Additionally, consumer
confidence remain to hover around high levels. Give data to
consumer confidence. Finally, real disposable income
continues to climb, leading consumers to make big ticket
purchases such as an automobile. It is for these reasons that
we feel confident regarding the demand of automobiles and
positive growth in the original equipment segment of our
model.
Industry Trends
Reduction of Labor Costs
Due to the uncertainty of input prices, tire manufactures
have searched for other avenues to cut costs. One of these
avenues has been to look to international markets for access
to lower-labor costs. Wages are the second largest cost to
the industry, representing 14.6% of all costs in 2014. We
can notice that Goodyear has done this by opening new
plants in Mexico and China. Another reason tire
manufactures are finding themselves expanding into these
areas is due to international competition. Domestic tire
manufactures have a difficulties competing against firms in
emerging markets that benefit from low labor costs.
Industrywide establishments are expected to increase to 619
by the year 2019, which is a 7% annualized increase from
current levels of 599.
Changing Market Demands
The great recession still has consumers feeling burnt, thus
looking to be more conscious with their budget. We believe
this will drive consumer to invest in tires that improve fuel
economy. Estimates project that these fuel efficient tires
will continue to outperform traditional tires going forward.
Since the industry has not had a substantial technological
leap in over a decade. We believe that firms in the industry
will focus heavily on these new tires and attempt to
differentiate products in order to gain market share. These
more fuel efficient tires will do not require substantial
capital investment, as these new product are able to build on
existing production lines with minimal investment
(IBISWorld).
Overview of Competition
The Tire Manufacturing is an industry that is comprised of
four main firms that account for 74% of all industry
revenue. This is illustrated in figure 3-1. There are two
essential business segments in this industry: original
equipment and replacement tires. Barriers to entry in the tire
manufacturing are high. The high barriers can be attributed
to the capital significant amount of capital investment to
begin operations, which can be attributed to the
astronomical cost of equipment, an increase in the
Markets & Competition
Important disclosures appear on the last page of this report.
regulatory environment, and the volatility of revenues.
These four main firms, in order to gain market share, have
recently invested an increased amount into research and
development in hopes of differentiating their product from
competitors.
Market Competition
Figure 3-1
Compagnie Générale des Etablissements Michelin
Michelin is the largest manufacturer of tires in North America.
With the ownership of twelve manufacturing facilities in The
United States and with average daily capacity of 165,000 tires,
in 2014, Michelin had revenues of $7,643 million. The
company’s current profitability can be attributed to their ability
to control pricing and its inventory and production volume.
Bridgestone Corporation
Bridgestone Corporation’s focus on eco-friendly products has
helped the company to increase market share and revenue
growth over the last few years. The company has more than
8,000 product lines. Recently, the firm has shifted its focus after
the recession to value-added products with the objective in mind
to sustain revenue growth. The Japan-based firm will benefit as
the revenues from America increase as the dollar increases
relative to the Yen, thus increasing Japanese exports.
Cooper Tire & Rubber Company
Cooper Tire & Rubber Company, the fourth-largest
manufacturer of tires in the United States, has shifted away from
their business model of not selling their tires to automobile
manufacturers. Recently, the company entered into an agreement
with Ford Motor Company to provide original equipment
manufacturing tires for their Ford Focus SE and Titanium
models. The company is currently experiencing an increasing
pressure from international competitors. To combat this
competition, the company has invested in plants in China and
Mexico. Although they have made these investments, the
government has not illustrated that they will lift the tariff on
imported tires.
Threat of New Entrants
There is a low threat of new entrants into the tire manufacturing
industry as the barriers to entry are high. Although there are not
significant government regulations or licensing agreements,
there are existing distribution channels and significant initial
capital outlays that deter competitors from entering the market.
Companies in the tire manufacturing industry must adhere to
regulation or face the prospect of being shut down. Therefore, it
is of severe importance for companies to hire the most skilled
labor to meet these stringent regulations. This makes it hard for
new entrants into the market as skilled employees are already
employed at existing companies and hiring them to join a new
firm would prove costly.
Threat of Substitutes
The threat of substitutes is low for the tire industry. Customers
who wish to drive a car must purchase tires. Technology for
producing tires has not changed in the past twenty years. The
current trend in the industry is to produce value-added products
from equipment already in place.
Bargaining Power of Customers
Bargaining power of customers is high due to low differentiation
of products within in the industry. Due to the low concentration
of purchasers and the high volume of tire orders, customers hold
immense bargaining power. In the future this bargaining power
will decrease as manufacturers start to sell directly to the
consumer. We believe that Goodyear has a great opportunity to
sell directly to consumers through the launch of the firm’s online
replacement tire website.
Bargaining Power of Suppliers
A majority of costs absorbed by tire manufactures is attributed to
the cost of raw material inputs. These raw materials may be
subject to commodity fluctuations. Thus, the bargaining power
of suppliers does shift with these price swings.
Intensity of Competitive Rivalry
There is intense competition within the tire industry which
can be attributed to a lack of product differentiation.
Although companies are starting to increase the production
of value-added products, most companies sell the same type
of tire which can breed market competition amongst the
largest players in the industry.
Overview
Goodyear Tire and Rubber Company ( NYSE: GT)
manufactures and sells tires and tire-related products across
the globe. In 2014, Goodyear represented 23.4% of all
revenue in its respective industry. This amount is the third
largest of its competitors. The firm was founded in 1898 by
by Frank Seiberling and is currently headed quartered in
Akron, Ohio. Goodyear has two main segments of
obtaining revenue: Original Equipment and Replacement.
Historically, the replacement tire segment has contributed to
70% of Goodyear’s total revenue.
Corporate Strategy
Since emerging from the depths of the Great Recession,
Goodyear has made a concerted effort to position itself to
take advantage of a recovering global economy. Goodyear
is focused on driving revenues through preserving long-
lasting relations with domestic automotive manufactures
while at the same time creating new-fresh relationships with
automotive manufactures in emerging markets.
Porter’s Five Forces
Company Analysis
Important disclosures appear on the last page of this report.
Additionally, through the replacement tire segment,
Goodyear aims to realign production with new consumer
preference of high-performance tires that improve a fuel-
conscious consumer of the 21st century.
Furthermore, Goodyear management has recently made a
concerted effort to put cash back into the pockets of
shareholders. The firm has issued dividends for the past
seven quarters. This dividend payment is on par with the
industry average. Additionally, the firms plans to
repurchase 11 million stocks from 2015 to 2016. This has
impacted our model’s treasury stock forecasts.
Products
Goodyear has two distinct types of products; Public label
and Private label. Public label tires are sold under various
house brand names such as Goodyear, Kelly, Dunlop,
Debica, and Fulda. Privates label tires are typically of
higher quality and are sold at higher margins than their
public counterparts. In 2014, Goodyear released 38 new
types of tires.
In response to consumer demands, Goodyear has made an
investment in producing more high-performance tires that
improve fuel economy. Goodyear believes that this
transition will be of little to no cost as existing production
lines can easily be fitted to produce these tires. The firm
does not receive the same revenue for tires in different
regions. This is illustrated in figure 4-6. The highest
revenue per tire is from North American operations, dialing
in at $132.32. The lowest of these regions is Asia, at
$90.30.
Revenue Decomposition
Goodyear obtains revenue through two main revenues
segments: Original Equipment and Replacement. Original
Equipment segment revenue encompasses revenues received
from automotive and aircraft manufactures that install a
Goodyear-brand tire as an input. Replacement revenues are
derived from the sale of Goodyear-brand tires that are sold
to individual consumers. Goodyear uses various channels to
reach consumers for the replacement tire segment, such as
independent dealers, retailers, and wholly-owned retail
stores. As shown in figure 4-1, Goodyear has credited
approximately 70% of revenues to the replacement tire
segment and 30% of revenues to the original equipment
segment in 2014. Historically, these averages hold merit.
Goodyear report a total revenue of $18,290 million in 2014.
We believe that the economic distress of Europe will lead to
lower levels of total revenue in the short term. We feel
confident that the firmed will observe an average-annual
increase in revenues of 1.93% through 2019 and revenue
increase of 2.32% once in steady state.
Original Equipment
Original Equipment revenues stem from the firm
exchanging Goodyear-brand tires to automotive and aircraft
manufactures for proceeds. Accordingly, this revenue
stream is highly dependent on the health of the automotive
industry. As such, we believe that this segment is still in
recovery, as pre-recession annual traffic of 60 million units
in 2006 has yet to be seen. In 2014 Goodyear reported total
units sold through original equipment operations of 49.1
million, which is still substantially lower than pre-recession
figures. We believe that an important factor in this
segment’s growth will be the developing partnerships with
car manufactures in emerging markets, specifically China.
Original Equipment in Asia, which is dominated by China,
has grown by 15.73% from 2012 to 2014, as depicted by
figure 4-2. During that same time period, North American
Original Equipment has remained flat. Recently Goodyear
has opened a development center in China that aims to
better satisfy the needs of Asian car manufactures. We
believe that due to investments made in the region and an
increasing level of demand from the Chinese middle class
that the steady state growth of 5.5% is warranted for the
region’s original equipment revenue stream.
Important disclosures appear on the last page of this report.
Replacement Tires
Replacement Tire revenue is generated through a variety of
different channels; independent dealers, retailers, and
wholly-owned retail stores. Consumers who purchase these
tires are simply looking to replace existing tires. With that
in mind, metrics such as Vehicle Miles Driven is a valuable
tool in gauging demand and forecasting revenues for this
segment. Additionally, Disposable Income which tracks the
portion of a consumer’s income that is available for
discretionary goods, such as tires, is important. With both
of these metrics projecting upward, we feel confident with
our replacement tire revenue annualized growth of 1.52%
before settling into our projected 2020 steady state of 2.24%
growth. As figure 4-3 illustrates, North American and
European operations contributed to over 70% of total
replacement tire revenues in 2014. It is because of this that
our model is very sensitive to economic conditions of both
regions. Additionally, by the year 2020 we believe that
Asian replacement tire operations will increase to represent
a largest proportion of total replacement revenues.
Geographical Regions
Goodyear divides operations into four geographical regions;
North America, Europe, Latin America, and Asia. North
American is what we consider the domestic market, as it
primarily dominated by the United States of America.
Europe is primarily dominated by the German markets.
Latin America is influenced primarily by Brazil. Finally,
Asia revenues mainly derive from China.
As of 2014, North America attributed to the largest
percentage of revenues at 44.44%. Europe followed second,
attributing 33.61% revenues. Together these two
geographical regions contribute to over 75% of all revenues.
With that in mind, our model is very sensitive to changes in
growth rates from these two regions.
Raw Materials Cost
Of the $12.7 billion registered to Cost of Goods Sold in
2014, approximately 38.5% is attributable to raw materials.
This is the largest bucket of costs for Goodyear. The two
main raw materials used in the creating tires are oil and
synthetic rubber. According to company guidance,
Goodyear expects to reduce the cost of raw materials by
10% in 2015 compared to 2014. We have adjusted our
model accordingly, by reducing 2015 COGS by 5% of its
traditional percent of sales forecast. This effect of reduced
raw material costs is evident in our model through 2017.
Historically, we have seen that Goodyear does pass the cost
of higher input cost onto the consumer in order to preserve
healthy operational margins. As figure 4-5 depicts, the
worldwide average price of a Goodyear-branded tire has
generally followed the price of its greatest input cost, oil.
Additionally, one third of raw materials are purchased
through foreign currencies such as Euro, Real, and the
Canadian dollar. Due to the U.S. dollar’s recent appreciate,
we project even further savings that we have adjusted into
the model for 2015 forecasts of decreasing COGS by .5%.
Labor
As of 2014 Goodyear has 69,000 employees (xi). Labor
payroll consists the second largest cost of goods sold behind
raw material inputs. Recently the firm has closed the
Amiens, France plant. According to company guidance, the
firm plans to absorb $75 million annualized savings. We
have adjusted this estimated savings into our cost of goods
sold forecasts through 2019.
Key Customers
Key customers will primary our original equipment, as there are
millions of customers within the replacement tire segment. Key
customers in North America include Ford Motor Company,
General Motors, and Boeing Company. Both Ford Motor
Important disclosures appear on the last page of this report.
Company and General Motors produce automobiles and trucks
and Boeing Company produces aircrafts. On the international
front primary customers include Fiat Chrysler Automobiles
Sumitomo Rubber Industries and GB Auto SAE.
Increase in Domestic Demand
We believe that there is an increase of demand coming up
for automotive tires for both original equipment and
replacement tires. As we have stated above, original
equipment revenue is highly dependent on the automotive
sales. The month of March registered an increase of 3.62%
in auto sales compared to the prior year. Additionally, our
confidence in various economic indicators such as consumer
confidence and lower auto-loan rates give us comfort in
believing that the automotive industry will continue to see
improvements. We also believe that there is a pent-up
demand for domestic replacement tires. As figure 5-1
illustrates, the light vehicle population has historically
tracked the shipment of light vehicle tires. We believe that
this figure suggests that a substantial increase of domestic
replacement tires is on the horizon.
Figure 5-1
Expansion in China
Goodyear has set its sights on winning in China. This is
found evident through the firms announced plans to expand
an existing manufacturing plant in Pulandian, China. The
expansion of the plant is meant to meet forecasted demand
needs from consumers in China for the replacement tire
segment. Additionally, Goodyear has recently opened a
development center. The first of its kind for Goodyear in
the region. This center aims to work directly with auto
manufactures in the region. We believe this will increase
the Original Equipment revenue from the Asia Region.
Additionally, we believe that despite lower-than-normal
growth rates in China that more individuals are poised to
move into the middle class, thus sparking automotive sales.
Lower Cost of Inputs
Goodyear is set to benefit from the current low-cost
environment of raw inputs. Costs-of-goods-sold has
historically been Goodyear’s largest expense to operations.
In 2014, this expense equated to 70.39% of Goodyear’s total
revenue. Additionally, raw material inputs contribute to the
largest portion of COGS. Thus due to low input prices, the
firm will aim to better operation margins. In an industry
that competes on margins, we believe that Goodyear will
specifically benefit as they do not typically have better
margins than their competitors.
Two third of raw material inputs are influenced by the lower oil-price environment.
Second largest raw material input, synthetic rubber, price is down 23.93% in March compared to the
prior year.
Domestic auto sales, which fuel the original equipment segment, have increased 3.63% year
over year.
Americans are consuming 4.4% more in 2015 Q1 than they did compared to 2014 Q1.
The low interest rate environment fuels continued borrowing for automobile sales.
Vehicle Miles Driven continues to climb, being fueled by low gasoline prices and the adoption of
fuel efficient automobiles and tires.
Goodyear will be the first domestic tire manufacture to launch an online store for
purchasing replacement tires.
We forecast that Goodyear is able to add value to the firm through positive economic profits and
maintaining a level of return on invested capital
greater than weighted average cost-of-capital.
Operations are not diversified economically.
Revenues from Europe, which contributed to 34.07% of total revenue, is subject to economic
hardships for the Eurozone, per our projections.
Compared to competitors such as Michelin and Bridgestone, Goodyear does not have impressive
operational margins.
Despite to current low-price environment of raw materials inputs, these commodities are subject to
fluctuations.
Valuation of Summary
We have reached a BUY recommendation for Goodyear
Tire and Rubber Company. We reached this conclusion by
using the discounted cash flow, economic profit, and
relative price-to-earnings models. Using the discounted
cash flow and economic profit models we produced an
intrinsic stock price of $31.09. This intrinsic price is
Catalysts for Growth
Investment Positives
Valuation
Investment Negatives
Important disclosures appear on the last page of this report.
14.18% higher than the current stock price of $27.23, thus
we feel confident in our belief that Goodyear is currently
undervalued. Additionally, using the relative P/E method of
valuation we solved for an intrinsic value of $33.26 for 2015
and a target price of $33.92 for 2016.
Due to a small pool of competitors that are publicly traded
on the New York Stock Exchange we used similar firms in
terms of market cap, price-to-earnings multiple, and
earnings-per-share. It is because some but not all in the
relative price-to-equity valuation are not in the same
industry, that we plan to put less in this intrinsic values of
$33.26 and $33.92.
We did not take our Dividend Discount Model into account,
due to Goodyear’s small track record with dividends.
Goodyear did not pay a dividends from 2004 to 2012. We
believe that the small sample size of only six quarters worth
of dividend payments along with the lack of company
guidance beyond 2016 that we do not feel confident in
forecasting dividend payments.
Revenue Decomposition & Growth Rates
The revenue stream of Goodyear can be broken into the two
operating segments of Original Equipment and Replacement
Tires. Additionally, these segments operate in four regions:
North America, Europe, Latin America, and Europe. We
project an average-annual growth of 1.99% from 2015 –
2019. We believe that Goodyear will reach a steady state
overall growth rate of 2.32% in 2020.
North America Operations
Operations in North American contributed 44.44% to total
revenues in 2014. With that in mind, revenue projections
for this region have a large impact on overall growth in our
model. Goodyear received an average revenue of $132.32
per tire sold in 2014 for North American operations. We
project an annual-average growth rate of 5% between 2015
and 2019, before settling into a 2.5% growth rate in 2020
and beyond. Revenues in North America are mainly
composed of sales from the United States, thus making the
model heavily influenced by the economic health of the
country.
The American automotive industry was hit hard during the
recession and the performance of Goodyear’s original
equipment segment is closely tied to its performance. Since
the end of the recession, North American original equipment
has yielded a return of 13.36% from 2010 to 2014. We
believe that the original equipment segment will increase
over the investment horizon due to the continued recovery
of the domestic automotive industry, a continued low-
interest rate environment, high levels of consumer
confidence, and positive growth trends in the real gross
domestic product.
Revenues stemming from replacement tires also projects to
increase over the investment horizon as well. Historically,
North American replacement tires have attributed to
approximately 40% of all tires sold. With that in mind we
believe it is imperative to gauge this specific revenue
stream. Replacement tires units sold has decreased by
15.14% from 2010 to 2014 and the price per tire sold has
had to compensate by increasing by 7.6% over this same
horizon. We believe that the cause of this drop is units sold
had been due to the heighten cost of driving. Currently, the
cost of driving has decreased substantially as the average
cost of gasoline in the United States is $2.41. This is
approximately a 40% drop in price from its high peak in
2010 Q1 and is a big variable as to why vehicle miles driven
is up 60% during this same time horizon. We believe that
2015 will post an 11% increase in replacement tire sold
compared to the prior year. Additionally, we are bullish on
the recent launch of Goodyear’s new online replacement tire
store. This new channel to reach consumers provides
Goodyear with organic growth.
Europe Operations
Operations in Europe contributed to 34.1% of total revenue
in 2014. Goodyear received an average revenue of $102.15
per tire sold in 2014 in the region as well. We project an
annualized-average growth rate of -1.8% between 2015 and
2019, before rebounding and settling into a 1% growth rate
in 2020 and beyond. The majority of revenues from this
region derive from Germany.
We believe that revenues from the European region will
ultimately be disappointing due to macro-economic factors,
as we foreseen the entire region plummeting into economic
stagnation. Additionally, Goodyear has closed a
manufacturing plant in Amiens, France that, despite cost
savings, will reduce Goodyear’s ability to service the region
properly. European revenues have decreased steadily
during the period of 2011 to 2014 by 23.13%. As unit sales
continue to drop, Goodyear has been unable to remedy with
a rise in sales price by actually lowering the revenue per tire
by 5.6%.
Asia Operations
Operations in Asia contributed to 11.45% total revenue in
2014. Goodyear received an average revenue of $90.30 per
tire sold in 2014 in the region. We project an annual-
average growth rate of 1.6% between 2015 and 2019, before
settling into a 5.5% growth rate in 2020 and beyond. A
majority of these revenues derive from operations in China.
We are optimistic with our projections in Asia, due to
Goodyear’s concerted effort to win in the region. From
2012 to 2014, the firm has increased output of tires to
automotive manufactures in the region by 15.73%.
Goodyear has recently open a development plant that is
aimed to better satisfy the needs of Asian car manufactures.
We believe that this investment will lead to higher revenue
growth, specifically in the long term, thus one reason that
we have such a high long term growth rate in our model.
Additionally, despite registering a lower-than-normal
Key Assumptions
Important disclosures appear on the last page of this report.
growth of 5.5% in China, we believe that the Chinese
middle class is looking to become very polarizing force. As
more Chinese are poised to join the middle class, their need
for replacement tires will also increase. It is because of this
thinking that we feel confident in Goodyear’s replacement
tire units sold to increase by 7.87% from 2014 – 2019.
Latin America Operations
Operations in Latin America contributed to 9.9% of total
revenue in 2014. Goodyear received an average revenue of
$103.22 per tire sold in 2014 in the region as well. We
project an annualized-average growth rate of .83% between
2015 and 2019, before settling into a 1% growth rate in
2020 and beyond. Revenues in Latin American are highly
dependent on Brazil. Goodyear has recently announced the
construction of a new manufacturing plant in the Americas
that will aim to better suit the needs of consumers for the
replacement tire sector. It is still unknown if this plant will
be built in Latin or North America.
Cost of Goods Sold
Cost of Goods Sold was forecasted using a percentage of
sales which equates to a ten year weighted-average (2005 to
2014). This large sample size allows us to capture how this
cost was affected through a multitude of economic events.
Additionally, we believe a weighted average (more recent
amount will be weighted more heavily) allows us to put
more emphasis on Goodyear’s more current cost habits.
Additionally, we have artificially decreased our COGS in
year 2015 and 2016 to reflect the short term effect of the
low price environment of raw inputs. These artificial
numbers were provided by company guidance.
Research and Development
Research and Development was forecasted using a
percentage of sales which equates to a ten year weighted-
average (2005 – 2014). This percentage equates to 1.89%.
We have increased this expense by .5% in the years of 2015
and 2016 to reflect recent developments of providing
consumer with more fuel efficient tires. In 2015, Goodyear
announced that the firm is in the process of developing a tire
that would charge the battery of a car (viii). In an industry
that is has little bargaining power over the consumer, we
believe that it is in the best interested of Goodyear to
development organic growth through industry changing
products such as this.
Property Plant & Equipment/Depreciation
According to company guidance given, we can expect gross
property, plant & equipment to increase by $1,130 million
in 2015 and $1,100 million in 2016. From 2017 and beyond
we have forecasted this account to increase by the historical
average of capital expenditures. Additionally, we were
given company guidance regarding depreciation in 2015 of
$724 million. For years after this date, we have forecasted
depreciation expense as a constant average percentage of
change in gross property, plant, and equipment. This
depreciation expense is added to the prior year’s
accumulated depreciation. This accumulated depreciation
account is then subtracted from gross plant property and
equipment to equal net plant property and equipment.
Pension Liability
In February 2015, Goodyear announced that they have
funded 1.15 billion to their pension plan since the end of
2014 (xi). According to company guidance, this funding
came through the use of cash. With this development in
mind, we have forecast a zero balance for our pension
liability going forward.
Weighted Average Cost-of-Capital
The weighted average cost-of-capital for Goodyear in 2014
registered at 6.85%. This value was calculated by taking the
weighted average of cost of equity and pre-tax cost of debt.
The cost of equity was calculated using the CAPM formula.
The risk-free rate of return of 2.52% was derived from the
yield of 30 year treasury. This market risk premium of
4.62% is the 87 year geometric average provided in class.
Finally, the beta was captured using the Damodar industry
average of 1.35 (vii). Goodyear’s cost of equity equated to
6.85%. The firm’s pre-tax cost of debt was derived from the
yield from a Goodyear 30-year corporate bond. This yield
was 5.99% on a 30-year Goodyear corporate bond. As
figure 6-1 illustrates, we forecast that Goodyear is able to
add value to the firm going forward. The firm adds value
when return on invested capital is greater than the weighted
average cost-of-capital.
Economic Profit
This driver is calculated as the spread between return on
invested capital and the weighted average cost-of-capital
multiplied by the beginning invested capital. If this value is
greater than zero, then we can assume that the firm added
value. In 2014 Goodyear added economic profit of $398
million to the firm. We forecast that the firm will add an
average economic profit of $380 million during the time
period of 2015 through 2019. Additionally, we forecast an
economic profit of $350 million in steady state, which will
be reached in 2020.
Due to the fact that we value the discounted cash flow and
economic profit valuation models we have constructed four
sensitivity tests.
Sensitivity Analysis
Important disclosures appear on the last page of this report.
Intrinsic Price: Beta and Risk Free Rate
We would wanted to test the capital structure of Goodyear.
The risk free rate is obtained from the yield of a 30 year
treasury bond. With the looming rise of rates, this value is
sure to change. Beta is also an important component of
capital structuring as it has a big impact on the cost of
equity. As a discretionary firm, Goodyear’s beta is subject
to volatility.
Intrinsic Price Beta
$31.09 1.15 1.20 1.25 1.30 1.35 1.40 1.45 1.50 1.55
1.00% $52.69 $49.91 $47.33 $44.93 $42.69 $40.60 $38.65 $36.82 $35.09
1.25% $49.69 $47.12 $44.74 $42.51 $40.44 $38.49 $36.67 $34.96 $33.34
1.50% $46.92 $44.55 $42.34 $40.27 $38.34 $36.53 $34.82 $33.21 $31.69
1.75% $44.36 $42.16 $40.11 $38.19 $36.38 $34.68 $33.08 $31.57 $30.14
CV Growth 2.52% $37.58 $35.81 $34.15 $32.58 $31.09 $29.69 $28.36 $27.10 $25.90
2.25% $39.79 $37.88 $36.09 $34.41 $32.83 $31.33 $29.92 $28.57 $27.30
2.50% $37.73 $35.95 $34.28 $32.70 $31.21 $29.80 $28.47 $27.20 $26.00
2.75% $35.81 $34.15 $32.58 $31.09 $29.69 $28.36 $27.10 $25.90 $24.76
3.00% $34.01 $32.45 $30.97 $29.58 $28.25 $27.00 $25.80 $24.67 $23.58
figure 7-1
WACC: Cost of Debt and Cost of Equity
Our model is highly sensitive to the discount factor of
weighted average cost of capital. The cost of equity in the
WACC calculation is crucial because the weight of equity is
58.94%. Additionally, we have estimated small changes in
the cost of debt.
WACC Cost of Equity
6.85% 6.76% 7.26% 7.76% 8.26% 8.76% 9.26% 9.76% 10.26% 10.76%
3.99% 5.10% 5.39% 5.69% 5.98% 6.27% 6.57% 6.86% 7.15% 7.45%
4.49% 5.24% 5.54% 5.83% 6.12% 6.42% 6.71% 7.01% 7.30% 7.59%
4.99% 5.39% 5.68% 5.97% 6.27% 6.56% 6.86% 7.15% 7.44% 7.74%
5.49% 5.53% 5.82% 6.12% 6.41% 6.71% 7.00% 7.30% 7.59% 7.88%
Cost of Debt 5.99% 5.67% 5.97% 6.26% 6.56% 6.85% 7.15% 7.44% 7.73% 8.03%
6.49% 5.81% 6.11% 6.40% 6.70% 6.99% 7.29% 7.58% 7.88% 8.17%
6.99% 5.96% 6.25% 6.55% 6.84% 7.14% 7.43% 7.73% 8.02% 8.32%
7.49% 6.10% 6.39% 6.69% 6.98% 7.28% 7.57% 7.87% 8.17% 8.46%
7.99% 6.24% 6.53% 6.83% 7.13% 7.42% 7.72% 8.01% 8.31% 8.60%
figure 7-2 Intrinsic Price: COGS as % of Revenue and Cost of Equity
Costs of goods sold is the largest expense absorbed by
Goodyear. As a firm that operates heavily on margins, we
were interested in the effect of the largest expense on the
intrinsic value of the stock price. As the cost of equity
raises, the effects of change COGS as a % of Revenue is
lessened.
Intrinsic Price Cost of Equity
$31.09 6.76% 7.26% 7.76% 8.26% 8.76% 9.26% 9.76% 10.26% 10.76%
64.39% $53.03 $47.64 $43.00 $38.94 $35.38 $32.21 $29.39 $26.85 $24.55
65.89% $51.66 $46.36 $41.79 $37.81 $34.30 $31.20 $28.42 $25.92 $23.67
67.39% $50.28 $45.08 $40.59 $36.68 $33.23 $30.18 $27.45 $25.00 $22.78
68.89% $48.91 $43.80 $39.39 $35.55 $32.16 $29.16 $26.48 $24.08 $21.90
COGS as % of Revenue 70.39% $47.53 $42.51 $38.19 $34.41 $31.09 $28.15 $25.52 $23.15 $21.02
71.89% $46.16 $41.23 $36.98 $33.28 $30.02 $27.13 $24.55 $22.23 $20.13
73.39% $44.78 $39.95 $35.78 $32.15 $28.95 $26.12 $23.58 $21.31 $19.25
74.89% $43.40 $38.67 $34.58 $31.02 $27.88 $25.10 $22.62 $20.38 $18.36
76.39% $42.03 $37.38 $33.38 $29.88 $26.81 $24.08 $21.65 $19.46 $17.48
figure 7-3 Intrinsic Price: WACC and ROIC CV
If returned on invested capital is greater than weighted
average cost of capital, then the firm adds value. We
wanted to illustrate how the effects of the firm adding and
losing value would have on the stock. The bottom left
portion of figure 7-4 shows the worst case scenario in terms
of adding value. In this instance WACC is much greater
than ROIC CV. The portion of the table to the top right
illustrates a best case scenario.
Intrinsic Price ROIC CV
$31.09 5.43% 5.48% 5.53% 5.58% 5.63% 5.68% 5.73% 5.78% 5.83%
5.85% $43.51 $43.79 $44.07 $44.34 $44.61 $44.88 $45.14 $45.39 $45.64
6.10% $39.59 $39.85 $40.11 $40.37 $40.62 $40.86 $41.10 $41.34 $41.57
6.35% $36.12 $36.37 $36.61 $36.85 $37.08 $37.31 $37.53 $37.75 $37.97
6.60% $33.03 $33.26 $33.48 $33.71 $33.92 $34.14 $34.35 $34.55 $34.75
WACC 6.85% $30.26 $30.47 $30.68 $30.89 $31.09 $31.29 $31.49 $31.68 $31.87
7.10% $27.75 $27.95 $28.15 $28.35 $28.54 $28.73 $28.91 $29.09 $29.27
7.35% $25.48 $25.67 $25.86 $26.04 $26.22 $26.40 $26.57 $26.74 $26.91
7.60% $23.41 $23.59 $23.77 $23.94 $24.11 $24.28 $24.44 $24.61 $24.76
7.85% $21.52 $21.69 $21.86 $22.02 $22.18 $22.34 $22.50 $22.65 $22.80
figure 7-4
Important disclosures appear on the last page of this report.
i. Buearu of Economic Analysis http://www.bea.gov/
ii. http://www.investopedia.com/terms/r/realgdp.asp iii. http://investor.goodyear.com/secfiling.cfm?filingID=9
50123-15-2527&CIK=42582
iv. http://research.stlouisfed.org/fred2/series/DAUTOSA#
v. Haver Analytics vi. http://clients1.ibisworld.com/reports/us/industry/atagl
ance.aspx?entid=525
vii. http://www.rubbernews.com/article/20150410/NEWS/150419998/irsg-forecasts-global-rubber-oversupply-
by-2020
viii. http://www.wired.com/2015/03/goodyear-trying-make-electricity-generating-tire/
ix. http://www.pionline.com/article/20140213/ONLINE/140219925/goodyear-freezes-us-hourly-pension-plans-
vulcanizes-db-plans-with-115-billion
x. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/Betas.html
xi. http://clients1.ibisworld.com/reports/us/industry/productsandmarkets.aspx?entid=525
xii. http://clients1.ibisworld.com/reports/us/bed/default.aspx?bedid=4149
xiii. http://clients1.ibisworld.com/reports/us/industry/competitivelandscape.aspx?entid=525
xiv. http://clients1.ibisworld.com/reports/us/industry/majorcompanies.aspx?entid=525
xv. http://clients1.ibisworld.com/reports/us/industry/operatingconditions.aspx?entid=525
xvi. http://clients1.ibisworld.com/reports/us/industry/keystatistics.aspx?entid=525
xvii. http://clients1.ibisworld.com/reports/us/bed/default.aspx?bedid=990038
xviii. http://advantage.marketline.com/Product?pid=D0DAB640-F767-45F7-A5E5-0C1522B746BA
xix. http://www.indexmundi.com/commodities/?commodity=rubber&months=120
xx. (http://www.bls.gov/web/ppi/ppi_dr.pdf) xxi. http://www.rubbernews.com/article/20150415/NEWS/
304069995/goodyear-opens-center-in-china
xxii. http://www.tirebusiness.com/article/20150414/NEWS/150419962/goodyear-talks-up-long-term-growth-
online-tire-site-rolls-out
xxiii. http://projects.wsj.com/econforecast/#ind=gdp&r=12 xxiv. http://clients1.ibisworld.com/reports/us/industry/major
companies.aspx?entid=525#MP9105
xxv. http://clients1.ibisworld.com/reports/us/industry/majorcompanies.aspx?entid=525#MP9105
xxvi. http://advantage.marketline.com/Product?pid=D0DAB640-F767-45F7-A5E5-0C1522B746BA
Important Disclaimer
This report was created by students enrolled in the Security
Analysis (6F:112) class at the University of Iowa. The report
was originally created to offer an internal investment
recommendation for the University of Iowa Krause Fund and
its advisory board. The report also provides potential
employers and other interested parties an example of the
students’ skills, knowledge and abilities. Members of the
Krause Fund are not registered investment advisors, brokers
or officially licensed financial professionals. The investment
advice contained in this report does not represent an offer or
solicitation to buy or sell any of the securities mentioned.
Unless otherwise noted, facts and figures included in this
report are from publicly available sources. This report is not
a complete compilation of data, and its accuracy is not
guaranteed. From time to time, the University of Iowa, its
faculty, staff, students, or the Krause Fund may hold a
financial interest in the companies mentioned in this report.
GoodyearKey Assumptions of Valuation Model
Ticker Symbol GT Tax RatesCurrent Share Price $27.23Current Model Date 2/18/2015 Federal 240Fiscal Year End Dec. 31 Foreign: ‐37
State: 12Pre‐Tax Cost of Debt 5.99% Pretax Income 687Beta 1.35 Total: 31.30%Risk‐Free Rate 2.52%Market Return 7.14%Equity Risk Premium 4.62%CV Growth of EPS 3.50%Current Dividend Yield 0.9%Effective Tax Rate 31%CV ROIC 5.63%CV Growth 2.00%Cost of Equity 8.76%WACC 6.85%
Goodyear Revenue Decompositionin millionsFiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020SS
Tires 20,992 19,540 18,138 18,290 18,617 19,215 19,372 19,949 20,412
Engineered Products ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Total Revenue 20,992 19,540 18,138 18,290 18,617 19,215 19,372 19,950 20,414
Units Sold (in millions of tires)
North America 62.6 61.7 61.1 67.82 73.25 76.91 76.14 77.66 79.60
international 101.5 100.6 101.4 93.58 89.70 90.91 93.57 97.38 99.56Worldwide Total 164.1 162.3 162.5 161.40 162.95 167.82 169.71 175.04 179.16
YoY % Chance ‐9.14% ‐1.10% 0.12% ‐0.68% 0.96% 2.99% 1.13% 3.14% 2.35%
Worldwide Units Sold (in millions of tires)
Replacement 114.4 111.9 112.9 112.48 113.56 116.86 118.07 121.72 124.44
Original Equipment 49.6 50.4 49.1 48.92 49.39 50.96 51.64 53.32 54.72
Worldwide Units Total 164.0 162.3 162.0 161.40 162.95 167.82 169.71 175.04 179.16
Tire Revenue (in millions) 20992 19540 18138 18290.35 18617.10 19214.73 19371.94 19948.88 20412.49
Worldwide Revenue per Tire ###### 120.39$ 111.96$ 269.69$ 254.17$ 249.84$ 254.43$ 256.87$ 256.42$
YoY % Chance
Replacement ‐13.46% ‐2.19% 0.89% ‐0.37% 0.96% 2.90% 1.04% 3.09% 2.24%
OE Tire Unites 2.48% 1.61% ‐2.58% ‐0.36% 0.95% 3.19% 1.33% 3.26% 2.62%
Total Tire Units ‐9.19% ‐1.04% ‐0.18% ‐0.37% 0.96% 2.99% 1.13% 3.14% 2.35%
tires)
Replacement 44.5 42.9 43.0 47.73 51.55 54.13 53.58 54.66 56.02
OE Tire Unites 18.1 18.8 18.1 20.09 21.70 22.78 22.56 23.01 23.58
Total Tire Units 62.6 61.7 61.1 67.82 73.25 76.91 76.14 77.66 79.60Tire Revenue (in Millions) 9666.0 8684.0 8085.0 8974.35 9692.30 10176.91 10075.14 10276.65 10533.56Revenue Per Tire ###### 140.75$ 132.32$ 132.32$ 132.32$ 132.32$ 132.32$ 132.32$ 132.32$
YoY % Chance
Replacement ‐11.00% ‐3.60% 0.23% 11.00% 8.00% 5.00% ‐1.00% 2.00% 2.50%
OE Tire Unites 13.13% 3.87% ‐3.72% 11.00% 8.00% 5.00% ‐1.00% 2.00% 2.50%
Total Tire Units ‐5.15% ‐1.44% ‐0.97% 11.00% 8.00% 5.00% ‐1.00% 2.00% 2.50%
International Segment(in millions of tires)
Replacement 69.9 69.0 69.9 64.75 62.02 62.73 64.49 67.07 68.42
OE Tire Units 31.5 31.6 31.5 28.83 27.69 28.18 29.08 30.31 31.14
Total Tire Units 101.4 100.6 101.4 93.58 89.70 90.91 93.57 97.38 99.56Tire Revenue (in Millions) 11,326 10,856 10,053 9316.00 8924.80 9037.82 9296.79 9672.24 9878.93Revenue Per Tire ###### 107.91$ 99.14$ 99.55$ 99.49$ 99.41$ 99.35$ 99.33$ 99.23$
YoY % Change
Replacement ‐14.96% ‐1.29% 1.30% ‐7.36% ‐4.23% 1.16% 2.80% 4.00% 2.02%
OE Tire Unites ‐2.78% 0.32% ‐0.32% ‐8.48% ‐3.97% 1.78% 3.21% 4.23% 2.71%
Total Tire Units ‐11.52% ‐0.79% 0.80% ‐7.71% ‐4.15% 1.35% 2.93% 4.07% 2.24%
Europe Segment(in millions of tires)
Replacement 46.4 44.2 43.7 39.33 36.97 37.34 38.09 39.61 40.01
Original Equipment 16.3 16.6 16.8 15.12 14.21 14.35 14.64 15.23 15.38
Total Tire Units 62.7 60.8 60.5 54.45 51.18 51.69 52.73 54.84 55.39Tire Revenue (in Millions) 6884 6567 6180 5562.00 5228.28 5280.56 5386.17 5601.62 5657.64
Revenue Per Tire ####### 108.01$ 102.15$ 102.15$ 102.15$ 102.15$ 102.15$ 102.15$ 102.15$
YoY % Change in Tire Units ‐15.61% ‐3.03% ‐0.49% ‐10.00% ‐6.00% 1.00% 2.00% 4.00% 1.00%
Latin America Segment(in millions of tires)
Replacement 11.8 12.4 13.5 13.23 13.10 12.97 13.36 13.76 13.96
Original Equipment 6.3 5.5 3.9 3.82 3.78 3.75 3.86 3.97 4.03
Total Tire Units 18.1 17.9 17.4 17.1 16.9 16.7 17.2 17.7 18.0
Tire Revenue (in Millions) 2085 2063 1796 1,760.08 1,742.48 1,725.05 1,776.81 1,830.11 1,857.56
Revenue Per Tire ######## $ 115.25 $ 103.22 $ 103.22 $ 103.22 $ 103.22 $ 103.22 $ 103.22 $ 103.22
YoY % Change in Tire Units ‐8.59% ‐1.10% ‐2.79% ‐2.00% ‐1.00% ‐1.00% 3.00% 3.00% 1.50%
Asia Segment(in millions of tires)
Replacement 11.7 12.4 12.7 12.19 11.95 12.43 13.05 13.70 14.45
Original Equipment 8.9 9.5 10.3 9.89 9.69 10.08 10.58 11.11 11.72
Total Tire Units 20.6 21.9 23 22.08 21.64 22.50 23.63 24.81 26.18
Tire Revenue (in Millions) 2357 2226 2077 1993.92 1954.04 2032.20 2133.81 2240.50 2363.73Revenue Per Tire ####### 101.64$ 90.30$ 90.30$ 90.30$ 90.30$ 90.30$ 90.30$ 90.30$
YoY % Change in Tire Units 0.49% 6.31% 5.02% ‐4.00% ‐2.00% 4.00% 5.00% 5.00% 5.50%
Net Sales By Region (in Millions)
North America 9666 8684 8085 8,974 9,692 10,177 10,075 10,277 10,534
Europe 6884 6567 6180 5,562 5,228 5,281 5,386 5,602 5,658
Latin America 2085 2063 1796 1,760 1,742 1,725 1,777 1,830 1,858
Asia 2357 2226 2077 1,994 1,954 2,032 2,134 2,241 2,364
Total International 11326 10856 10053 9,316 8,925 9,038 9,297 9,672 9,879
total Tire Rev 20992 19540 18138 18,290 18,617 19,215 19,372 19,949 20,412
Engineered Products
Total Rev 20992 19540 18138 18,290 18,617 19,215 19,372 19,949 20,412
YoY % Change in Sales Forecast Forecast Forecast Forecast Forecast ForecastNorth America ‐1.96% ‐10.16% ‐6.90% 11.00% 8.00% 5.00% ‐1.00% 2.00% 2.50%
Europe ‐14.38% ‐4.60% ‐5.89% ‐10.00% ‐6.00% 1.00% 2.00% 4.00% 1.00%
Latin America ‐15.66% ‐1.06% ‐12.94% ‐2.00% ‐1.00% ‐1.00% 3.00% 3.00% 1.50%
Asia ‐1.63% ‐5.56% ‐6.69% ‐4.00% ‐2.00% 4.00% 5.00% 5.00% 5.50%
Total International ‐12.26% ‐4.15% ‐7.40% ‐7.33% ‐4.20% 1.27% 2.87% 4.04% 2.14%
total Tire Rev ‐7.80% ‐6.92% ‐7.18% 0.84% 1.79% 3.21% 0.82% 2.98% 2.32%
Engineered Products
Total Rev ‐7.80% ‐6.92% ‐7.18% 0.84% 1.79% 3.21% 0.82% 2.98% 2.32%
GoodyearBalance Sheetin millionsFiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020SSAssets
Current Assets
Cash & Short-Term Investments 2,281 2,996 2,161 4,064 5,215 5,537 4,633 9,866 6,807
Accounts Receivables, Net 2,563 2,435 2,126 2,492 2,629 2,810 3,129 2,831 3,429
Inventories 3,250 2,816 2,671 2,838 2,982 3,366 3,198 3,145 3,696
Prepaid Expenses & Other Current Assests 404 397 766 346 352 363 366 377 386
Total Current Assets 8,498 8,644 7,724 9,740 11,179 12,076 11,326 16,219 14,318
Long Term Assets
Property, Plant & Equipment - Gross 15,947 16,478 16,184 16718 16418 17046 18152 19291 20465
Less Accumulated Depreciation 8,991 9,158 9,031 9755 10509 11294 12112 12963 13850
Net Property, Plant & Equipment 6,956 7,320 7,153 6963 5909 5752 6040 6327 6615
Total Investments and Advances 41 49 51 52 52 53 54 55 56
Goodwill 664 668 601 601 601 601 601 601 601
Gross Other Intangibles 140 138 138 155 155 155 155 155 155Less Amortization ‐ ‐ ‐ 1 2 3 4 5 6
Net Other Intangibles 140 138 138 154 153 152 151 150 149
Deferred Tax Assets 186 157 1,762 109 109 109 109 109 109
Other Assets 488 551 680 680 680 680 680 680 680
Total Assets 16,973 17,527 18,109 18,299 18,683 19,424 18,961 24,142 22,528
Liabilities & Shareholders' Equity
Notes Payable 102 14 30 155 162 178 182 173 205
Current Portion of LT Debt 96 73 148 148 446 400 183 1923 800Accounts Payable 3,223 3,097 2,878 2,508 2,553 2,635 1,718 1,875 2,517
Income Tax Payable ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Accrued Payroll 719 758 724 743 756 781 787 811 829
Other Current Liabilities 1,182 1,083 956 956 956 956 956 956 956
Total Current Liabilities 5,322 5,025 4,736 4,510 4,874 4,950 3,826 5,738 5,307
Long Term Liabilities
Long-Term Debt 4,888 6,162 6,216 5,198 4,411 4,294 4,206 6,689 4,765
Provision for Risks & Charges ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Deferred Tax Liabilities 264 256 181 261 261 261 261 261 261
Warranty Liabilities 24 21 17 19 19 19 19 19 19
Pension Liability 4,340 2,673 1,676 ‐ ‐ ‐ ‐ ‐ ‐
Other Long term Liabilities 976 945 856 2,532 2,532 2,532 2,532 2,532 2,532
Total Liabilities 15,814 15,082 13,682 12,519 12,097 12,055 10,844 15,238 12,883
Preferred Stock (Carrying Value) 500 500 ‐ ‐ ‐ ‐ ‐ ‐ ‐
Common Stock 3,060 3,095 3,410 3,417 3,443 3,469 3,472 3,482 3,524
Teasury Stock ‐ ‐ ‐ 6 5 ‐ ‐ ‐ ‐
Retained Earnings 1,424 2,087 4,548 5,899 6,681 7,431 8,176 8,953 9,652
Accumulated Other Comprehensive Income (4,725) (4,183) (4,546) (4,546) (4,546) (4,546) (4,546) (4,546) (4,546)
Total Shareholders' Equity 259 1,499 3,412 4,765 5,572 6,354 7,103 7,889 8,630
Accumulated Minority Interest 900 946 1,015 1,015 1,015 1,015 1,015 1,015 1,015
Total Equity 1,159 2,445 4,427 5,780 6,587 7,369 8,118 8,904 9,645
Total Liabilities & Shareholders' Equity 16,973 17,527 18,109 18,299 18,684 19,424 18,962 24,143 22,528
Income Statementin millionsFiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020SSNet Revenue 20,992 19,540 18,138 18,290 18,617 19,215 19,372 19,949 20,412
COGS 16,080 14,285 12,768 12,052 12,826 13,622 13,733 14,142 14,471
Depreciation 684 719 730 724 754 785 818 852 887
Amortization of Intangibles 3 3 2 1 1 1 1 1 1
Gross Income 4,225 4,533 4,638 5,514 5,037 4,807 4,820 4,954 5,054
SG&A Expense 3,088 3,148 2,720 2,469 2,885 2,978 3,002 3,091 3,163
Research & Development 370 390 399 512 503 362 365 369 362
EBIT (Operating Income) 1,137 1,385 1,519 2,533 1,649 1,467 1,453 1,494 1,529
Nonoperating Income - Net (131) 5 (178) ‐ ‐ ‐ ‐ ‐ ‐
Interest Expense 357 448 505 374 321 274 268 263 411
Unusual Expense - Net 209 129 102 ‐ ‐ ‐ ‐ ‐ ‐
Pretax Income 440 813 687 2,159 1,328 1,193 1,185 1,231 1,118
Income Taxes 203 138 (1,834) 676 416 373 371 385 350
Consolidated Net Income 237 675 2,521 1,483 913 820 814 846 768
Minority Interest 25 46 69 69 69 69 69 69 69
Net Income 212 629 2,452 1,414 844 751 745 777 699
Preferred Dividends 29 29 7
Net Income available to Common 183 600 2,445 1,414 844 751 745 777 699
EPS 1.33 2.60 9.02 5.36 3.25 2.88 2.85 2.96 2.64
Total Shares Outstanding 245.24 248.00 269.00 264 260 261 261 262 265
Cash Dividends 12 59 63 62
GoodyearCash Flow Statementin millionsFiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020SSCash Flow
Operating Activities
Adjustments to reconcile net cash by operating activities:
Net Income / Starting Line 237 675 2,521 1,414 844 751 745 777 699
Depreciation 684 719 730 724 754 785 818 852 887
Amortization 3 3 2 1 1 1 1 1 1
Change in Deffered Liabilities 20 (8) (75) 80 - - - - -
Change in Deffered Assets (41) 29 (1,605) 1,653 - - - - -
Change in Working Capital:
Receivables 286 128 309 (366) (138) (180) (319) 298 (598)
Inventories 606 434 145 (167) (144) (384) 167 53 (551)
Prepaid Expenses & Other Assets (69) 7 (369) 420 (6) (11) (3) (11) (9)
Accounts Payable (445) (126) (219) (370) 45 82 (917) 157 642
Income Taxes Payable - - - - - - - - -
Other Current Liabilities 132 (99) (127) - - - - - -
Accrued Payroll (80) 39 (34) 19 13 24 6 23 19
Net Operating Cash Flow 1,333 1,801 1,278 3,408 1,369 1,067 499 2,150 1,090
Investing Activities
Capital Expenditures (943) (531) 294 ‐534 300 ‐628 ‐1105 ‐1139 ‐1174
Total Investments and Advances - (8) (2) ‐1 ‐1 ‐1 ‐1 ‐1 ‐1
Net Goodwill (10) (4) 67 - - - - - -
Other Assets (43) (63) (129) - - - - - -
Net Other Intangibles 17 2 - (17) - - - - -
Pension Liabilities 338 (1,667) (997) (1,676) - - - - -
Other Long Term Libabilities (45) (31) (89) 1,676 - - - - -
Net Investing Cash Flow (686) (2,302) (856) ‐552 299 ‐629 ‐1106 ‐1140 ‐1175
Financing Activities
Common Stock 7 35 315 7 26 26 3 10 42
Dividends Paid 0 ‐12 ‐47 ‐63 ‐62 0 0 0 0
Treasury Stock 0 0 0 -6 0 5 0 0 0
Change in Current Portion of LT Debt (214) (111) 91 - 298 (46) (217) 1,740 (1,123)
Change in Notes Payable 125 8 16 4 (9) 32
Change in Accumulated Minority Interest 25 46 69 - - - - - -
Change in Long-Term Debt 99 1,274 54 (1,018) (787) (117) (88) 2,483 (1,924)
Change in Other Comprehensive Income (4,725) 542 (363) - - - - - -
Change in Warrenty 4 (3) (4) 2 - - - - -
Net Financing Cash Flow ‐4804 1771 115 ‐953 ‐517 ‐116 ‐297 4223 ‐2974
Net Change in Cash (491) 715 (835) 1,903 1,151 322 (905) 5,233 (3,059)
add beginning Cash 2772 2281 2996 2161 4064.149 5215.3844 5537.445 4632.911 9865.9322Ending Cash 2,281 2,996 2,161 4,064 5,215 5,537 4,633 9,866 6,807
GoodyearCommon Size Balance Sheet
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020SSAssets
Current Assets
Cash & Short-Term Investments 10.87% 15.33% 11.91% 22.22% 28.01% 28.82% 23.92% 49.46% 33.35%Accounts Receivables, Net 12.21% 12.46% 11.72% 13.62% 14.12% 14.62% 16.15% 14.19% 16.80%Inventories 15.48% 14.41% 14.73% 15.52% 16.02% 17.52% 16.51% 15.77% 18.11%Prepaid Expenses & Other Current Assests 1.92% 2.03% 4.22% 1.89% 1.89% 1.89% 1.89% 1.89% 1.89%Total Current Assets
Long Term Assets
Net Property, Plant & Equipment 33.14% 37.46% 39.44% 38.07% 31.74% 29.94% 31.18% 31.72% 32.41%Property, Plant & Equipment - Gross 75.97% 84.33% 89.23% 91.40% 88.19% 88.71% 93.70% 96.70% 100.26%Accumulated Depreciation 42.83% 46.87% 49.79% 53.33% 56.45% 58.78% 62.52% 64.98% 67.85%Total Investments and Advances 0.20% 0.25% 0.28% 0.28% 0.28% 0.28% 0.28% 0.28% 0.27%Net Goodwill 3.16% 3.42% 3.31% 3.29% 3.23% 3.13% 3.10% 3.01% 2.94%Net Other Intangibles 0.67% 0.71% 0.76% 0.85% 0.83% 0.81% 0.80% 0.78% 0.76%Deferred Tax Assets 0.89% 0.80% 9.71% 0.60% 0.59% 0.57% 0.56% 0.55% 0.54%Other Assets 2.32% 2.82% 3.75% 3.72% 3.65% 3.54% 3.51% 3.41% 3.33%Total Assets 80.85% 89.70% 99.84% 100.05% 100.35% 101.09% 97.88% 121.02% 110.36%
Liabilities & Shareholders' Equity
ST Debt & Curr. Portion LT Debt 0.49% 0.07% 0.17% 0.85% 0.87% 0.93% 0.94% 0.87% 1.00%Accounts Pay