With auto sales at their highest since July 2005, industry suppliers like today’s recommendation are seeing rising earnings and margins.
Goodyear Tire (GT)
from The DRIP Investor
Driven partly by low interest rates and cheap gasoline, U.S. auto sales are on track this year to post their highest level in 15 years. The strength in the U.S. auto market is good news for Goodyear Tire (GT), a leading provider of tires. The firm has been putting up solid profit numbers, beating analysts’ consensus earnings estimate in each of the last four quarters.
Goodyear Tire is one of the world’s largest tire manufacturers. Brands include Goodyear, Dunlop, and Kelly. The firm also operates commercial truck service and tire retreading centers and approximately 1,200 auto service locations.
Goodyear is benefiting from a number of tailwinds. As previously mentioned, strong U.S. auto sales are a plus. Also, the company’s commodity inputs, especially rubber, are favorably priced. Lower input costs have helped the firm’s profit margins expand sharply. In the second quarter, North America segment operating margins jumped to 15.8% versus 10.2% in the year-earlier period. Overall, the company’s operating margin was 13% for the quarter, with the firm showing margin gains in every segment except Latin America.
The news wasn’t all great during the quarter. Goodyear, like virtually every multinational, continues to fend off currency headwinds. Despite tire unit volumes that rose 1% for the quarter (4% increase in original equipment units, 1% drop in replacement units), sales for the quarter were $4.2 billion, down from $4.7 billion a year earlier. Nearly all the sales decline was due to the strong dollar.
When buying companies in cyclical industries, it is important to recognize the cycle. There is some concern that the U.S. auto market is near peak sales. Nevertheless, Goodyear has opportunities for growth in other geographic markets that are currently underperforming the U.S. Indeed, business in Latin America and Europe should improve as those economies recover, providing some offset should U.S. sales flatten.
Admittedly, companies with exposure to cyclical industries have never been high on my recommended list. However, Goodyear is an exception. The company seems well-positioned to continue to drive profit growth. While the yield of 0.9% is on the low side, I would expect dividend growth to be in the high single digits to low double digits over the next three years.
Earnings estimates for 2015 and 2016 have risen over the last 30 days. Underscoring the company’s strong operating momentum and value, Goodyear’s Quadrix scores are impressive, with an Overall score of 98, a Value score of 91, and a Quality score of 93 (all scores out of a possible 100). I expect Goodyear stock to outperform the market over the next 12 months.
Please note Goodyear offers a direct-purchase plan whereby any investor may buy the first share and every share of stock directly from the company. Minimum initial investment is $250.
Charles B. Carlson, CFA, DRIP Investor, www.dripinvestor.com, 800-233-5922, September 2015