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GOODYEAR TIRE AND RUBBER COMPANY (NASDAQ: GT) Analysts Zhi Cheng (Nicole) Low Shruti Shah Sashikanth (Sash) Yenika Presented on December 1, 2015 Screening Process New Industry for Portfolio Diversification 20Day MA > 200Day MA Piotroski Score = 6 Current Price vs. 52w High = -0.05 % > -10 % Market Cap. Mid Cap: 2B – 10B Altman Z-score = 1.98 Company Introduction Business Description Market Develops, manufactures, and sells tires, and rubber-related products Cap for automotive and industrial $9.36 Billions applicants TTM P/E 3.39x TTM EPS $10.26 Primary Industry Year Founded Tire Manufacturing August 29, 1898 Global Headquarters Employees Akron, Ohio, U.S.A Approximately 67,000 Sources: Goodyear Official Website and Yahoo Finance! Business Overview and Segments Sources: Goodyear 2014 10K, pg. 6-20 Global Operating Facilities EMEA o 17 manufacturing facilities in 9 countries o Supplies tires to vehicle manufacturers throughout the region North America o 18 manufacturing facilities in US and Canada o Supplies tires to manufacturers of automobiles, motorcycles, trucks and aircraft Latin America o 6 manufacturing facilities in 5 countries o Manufactures and sells automobile and truck tires Sources: Goodyear Official Website Around 50 Manufacturing Facilities in 22 countries Two R&D facilities and technical centers Eight tire proving grounds Approximately 1,200 retail outlets Around 60 tire retreading facilities, and 170 warehouse distribution facilities. Asia Pacific o 8 manufacturing facilities in 6 countries o Sells primarily Goodyear brand tires across the region o Sells Dunlop brand in Australia and New Zealand Management Analysis Effective corporate governance policies All directors are independent, except CEO and one labor union-affiliated director 100% independent compensation, audit and nominating committees Shareholders have the right to call a special meeting at 25% Management’s Strategic Priorities CURRENT POSITION INDUSTRY MEGATRENDS KEY HOW TO’S KEY STRATEGIES INDUSTRY MEGATRENDS GT’S DESTINATION CREATING SUSTAINABLE GROWTH o o o o o o o Sources: Goodyear 2014 10K, pg 4 Growth in emerging markets Profitable segments in mature markets HVA (high value added) tires in mid-tier Green trend Tire labeling Internet changing buying behavior Changes are evolutionary not revolutionary SWOT Analysis Strengths o Strong R&D o Manufacturing capabilities o Strong market presence Weaknesses S W Opportunities o New products & services o Business expansion activities o Buoyant demand for automobiles o High leverage ratios Threats O T o Stringent regulations o Intense competition both in price and quality o Appreciation of US$ results in unfavorable foreign currency translation GT’s Three-year Performance Summary Sources: Goodyear 2014 10K Stock Market Prospect Sources: Yahoo Finance! Industry Overview Tire Manufacturing Industry Major market – USA & Europe Growing Market – Asia Pacific Major manufacturing products – motor vehicle and aircraft tires, inner tubes and tire repair materials Future Industry Outlook Cater to changing consumer preferences by developing and selling fuel efficient cars Expansion of product lines and streamlining operations Industry expected to grow at an annualized rate of 0.8% to $19.4bn by 2020 Sources: www.ibisworld.com Industry Overview Drivers Challenges Sources: www.ibisworld.com & Global Industry Analysts, Inc. •Expected stable increase in Automobile production •Increasing demand for advanced tire models •Aging vehicles leading to more demand for replacement tires •Increasing vehicle miles travelled •Inconsistency in supply and demand leading to overcapacity •Falling automobiles per household Porter’s Five Forces Analysis o Large capital requirements o High sunk cost o Strong brand name o Economies of scale & updated technology o Low concentration of major suppliers o Volatility in prices of major raw materials Supplier’s Bargaining Power (High) o Essential component o There aren’t any substitutes Threat from New Entrants (Low) Industry Rivalry (Moderate) Threat of Substitutes (Low) o Very few powerful competitors o Low cost competition from Asian companies o High market grown o High levels of product differentiation Buyer’s Bargaining Power (Moderate) Original Equipment (High) o Highly concentrated market o Low switching cost for buyers Replacement (Low) o High service level & short delivery time o Small size buyers & not concentrated Macroeconomic Overview World Price of Rubber Cents per pound World Price of Crude Oil Dollar per barrel 120 100 80 60 40 20 0 2013 2014 2015 2016 2017 Year 2018 2019 150 100 50 0 2012 2020 2014 Trade Weighted Index (Exchange Rate Fluctuation) 120 Index 100 80 60 40 20 0 2013 Sources: www.ibisworld.com 2014 2015 2016 2017 Year 2018 2019 2020 2016 Year 2018 2020 Macroeconomic Overview Sources: www.ibisworld.com Comparable Valuation Sources: CapitalQ and Yahoo Finance! Financial Analysis Steady increase in profitability ratios despite declining asset turnover led to improved returns Income tax benefits in 2014 DuPont Analysis and Greenblatt Ratios Greenblatt ratios indicate further room for improvement in efficient use of operating assets DUPONT ANALYSIS Financial Projections Revenue projections are made using the average price of raw materials and expected units to be sold KEY INCOME STATEMENT ITEMS KEY BALANCE SHEET ITEMS WACC High leverage and volatility in key economies like Latin America DCF Valuation Implied Price VALUE PER SHARE SENSITIVITY ANALYSIS Recommendation GT provides diversification benefits to our existing portfolio o Improving margins o High demand from emerging markets o Demand for high-value-added tires with features like fuel saving, wet traction or ride comfort o Stock Price Dividend yield 0.90% DCF Valuation: $37.95 Current Stock Price: $34.88 Sources: Yahoo Finance! Recommendation: Relative Valuation:$ 43.26 Target Price: $39.54 BUY 200 shares At current market price Stock Price Strong US$ Economic instability and political unrest in key markets THANK YOU! Q&A