Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – January 2015. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Goodyear Tire & Rubber Company (GT) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Goodyear Tire & Rubber Company is a manufacturer of tires. The Company develops, manufactures, market and distributes tires. The Company manufactures and markets rubber-related chemicals. The Company is an operator of commercial truck service and tire retreading centers. The Company has four operating segments: North America; Europe, Middle East and Africa (EMEA); Latin America and Asia Pacific. The Company manufactures and markets lines of rubber tires for automobiles, trucks, buses, aircraft, motorcycles, farm implements, earthmoving and mining equipment and industrial equipment. The Company’s tires are offered for sale to vehicle manufacturers for mounting as original equipment (OE) and for replacement worldwide. The Company retread truck, aviation and off-the-road tires (OTR), manufactures and sells tread rubber and other tire retreading materials, sells chemical products and provides automotive repair services.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – FAIL
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$26.02|
|Value Based on 0% Growth||$15.25|
|Market Implied Growth Rate||2.70%|
|Net Current Asset Value (NCAV)||-$24.18|
Balance Sheet – September 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Goodyear Tire & Rubber Company is not suitable for the Enterprising Investor or for the Defensive Investor. The Defensive Investor is concerned by the low current ratio, insufficient earnings stability over the last ten years, short dividend history, as well as the high PB ratio. The Enterprising Investor is concerned by the level of debt relative to the net current assets and the lack of earnings stability over the last five years. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time. From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $0.54 in 2010 to an estimated gain of $1.79 for 2014. This level of demonstrated growth is greater than the market’s implied estimate of 2.7% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.
Be sure to check out previous ModernGraham valuations of Goodyear Tire & Rubber Company (GT) for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Goodyear Tire & Rubber Company (GT)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Goodyear Tire & Rubber Company (GT) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.