Nomura Gets Bullish On Goodyear Turnaround

Earnings Growth And Dividends In Uncertain Times

Nomura Instinet analyst Anindya Das has gotten bullish on Goodyear Tire (GT). The analyst has initiated coverage on the world’s largest tire company with a buy rating implying a 30% upside to today’s prices. The $20 target would mark a 10-month high if reached today and may only be the beginning of this stocks 2020 run.

"Goodyear is an attractive, defensive stock within the auto and auto parts space, in our view, at a time when the economic growth outlook for 2020 is somewhat muddied,"

Global growth slowed substantially in the second half of 2018 and remained weak through 2019. Analysts are expecting economic activity to pick up in 2020 but the acceleration will be tepid, from about 2.6% this year to only 2.8% by 2021. Trade relations between the U.S. and China are the primary culprit. The expected signing of the Phase One Trade Deal could change all this but we still don’t know exactly what it says.

The Catalysts For Growth Are There

Das cites three catalysts for the stock over the next year. The first is a strong earnings recovery starting in 2020 related to the company’s restructuring efforts. Goodyear’s EPS is expected to grow by 60% in 2020 alone with those gains extending themselves in future years. Much of the gains will come in the 1st quarter of 2020, the analysts are expecting 208% YOY EPS in the calendar 1st quarter, so investors can expect this stock to start moving soon.

The second catalyst for Goodyear is it’s exposure to the aftermarket. With prices for new autos on the rise car owners are turning more and more to pre-owned and used cars if they choose to buy at all. Another trend within the aftermarket industry is the life-expectancy of our vehicles. The average lifespan of a car has been steadily rising for decades and seen a sharp upturn in recent years. The average of all light-autos in 1995 was only 8.5 years, the average age of all light-vehicles today is closer to 12 years.

The third catalyst for Goodyear is its valuation. After years of struggle, the company’s stock is now trading at bargain-basement levels. The stocks forward P/E ratio is an uber-low 10.5 and that comes with a dividend yield of 4.2%. The S&P 500 is trading closer to 19X forward earnings and pays a mere 1.75%.

The dividend is a safe one too and growing. The trailing payout ratio is only 44%, the forward ratio (based on next year’s outlook) is 28% which leaves ample room for future increases. Regarding distribution increases, Goodyear has been raising the payout for 6 years with a CAGR of 63%.

The Technical Outlook: Reversal Is Underway

Shares of Goodyear Tire have been in a protracted downtrend since hitting their peak in mid-2017. Now, down more than 100%, the stock is effecting a reversal. Share prices hit a bottom earlier this year when the outlook for 2020 growth became real. Since then share prices have popped and recovered a key technical level. The $15 level was the launchpad for the 2013-2017 rally, provided support and then resistance during the recent downtrend. Now, with prices back above that level and showing signs of support the outlook for price action is bullish.

The MACD indicator concurs with the bullish outlook. A three-year extreme peak in momentum shows a significant change in market dynamics and a change of control from bears to bulls. The risk is that support will fail but, with the outlook for growth so robust and the dividend so attractive, that is not likely.

In the near-term, share prices may continue to move sideways at this level or even retreat to retest support. Longer-term, a rally is expected to form in the New Year that will take this stock up to the $17 and $20 levels in their turn. Goodyear’s next earnings report is due out the first week of February.