by Jeff Reeves | April 27, 2012 12:50 pm
Goodyear Tire & Rubber Co. (NYSE:GT) reported earnings before the bell Friday, then got wrecked by Wall Street. The company dropped as much as 11% after the market opened (though it bounced back in late trading) following its first quarterly loss in more than a year.
But investors should look deeper than this oversimplified headline. The details of the earnings are actually pretty good, and the company continues down the bumpy road of recovery. That means this could be a bargain recovery play.
Disclosure: I personally own Goodyear stock. I bought in a few weeks ago at $10.66 a share — and if you bought at the intraday low Friday, you would have a similar entry point.
Though a risky investment to be sure, I think the progress Goodyear has made on improving its capital structure and streamlining its business over the past few years is commendable and could pay off significantly for investors a year or two down the road.
Let’s get right to the earnings. Goodyear posted a net loss of $11 million, or 5 cents per share, compared to a profit of $103 million, or 42 cents per share, for the same period a year earlier. That’s bad.
Goodyear also saw tire orders fall thanks to a softening economy in some global markets, most notably Europe. That’s also bad.
However, investors should have expected weakness in Europe. The British economy is officially in a double-dip recession, and Spain’s credit rating recently was downgraded by Standard & Poor’s.
As for the loss, special charges were the biggest driver of those declines. The costs of refinancing long-term debts shaved 35 cents off earnings in one fell swoop. And while nobody should like a loss, that kind of capital restructuring is undoubtedly good for a manufacturer like Goodyear that still is trying to get out from under deep losses and debts incurred during the financial crisis and Great Recession.
First-quarter sales actually were up 2% to $5.5 billion despite Europe weighing on worldwide tire volume. And North American profits doubled despite a drop in orders, thanks to customers and automakers looking for higher-quality tires to boost fuel efficiency and performance. These are higher-margin products and juiced GT profits domestically. This trend should only continue — especially the focus on fuel efficiency, as gasoline remains around $4 per gallon.
True, there are short-term headwinds for Goodyear. The company said it now expects its 2012 full-year tire unit volume to be about 2% below 2011 volume of 180.6 million tires. And let’s not pretend the mess in Europe is going away anytime soon.
But Goodyear will easily come in with a profitable fiscal 2012, and its credit facilities refinancing allowed a $2 billion line of credit to be extended through 2017, while its second lien term loan was extended to 2019. No term debt repayments are required until 2019, according to the company, which allows Goodyear to focus on its business instead of just trying to pay its creditors.
You can expect more rough days for Goodyear this spring and summer. But when the market responds in knee-jerk fashion, investors should pounce. Consider that GT actually opened up on Friday before it dropped like a rock … and after Goodyear bottomed at $10.72, it quickly snapped back up to $11.50. This shows that while there still is selling pressure, many smart investors agree that this company could be a bargain at current depressed levels.
To be clear, don’t chase Goodyear. I like my $10.66 entry point, but I wouldn’t advise paying more than $12.50 or so for shares.
But if you dig into the earnings and explore this company like I did, I think you’ll agree that the bargain valuation (a P/E of about 9 on fiscal 2012 earnings and under 5 based on the admittedly foggy 2013 forecasts) give you a reason to take a shot on Goodyear.
It’s not fashionable to buy a turnaround manufacturer in America’s “Rust Belt,” and it’s always risky to play with a stock that has trouble turning a quarterly profit. But after all the froth in tech and financials to start 2012, I would caution investors from expecting stocks that have gone up to continue going up.
Goodyear isn’t sexy, but it could serve you very well during the next 18 months.
Jeff Reeves is the editor of InvestorPlace.com, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the investments named here.
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