Tuesday, 13 January 2015

Goodyear: clear range but not at prevailing

I was not expecting to write about Goodyear today but here we are as the company issued a surprising update ahead of a corporate presentation.  Of course the charts that capture the attention are the guidance ones, specifically this one indicating the impact of quelle surprise weaker international markets such as Europe and the stronger US dollar.

Back in October I talked about the company (link here) with the observation that it is was in a US$22-28 broad range.  Given today's range I should have heeded my own advice and gone short...but hindsight is everything.  

Back in this previous report I noted the positive price-mix (net of raw material costs), cost cutting and 'destination' trends and factors.  Elements of this remain even if volume or FX headwinds have increased in influence:   

The 'destination' remains headline attractive (especially the 'annual positive free cash flow') but note the debt line which is still far higher than most of its peers.  

And this shows up in the medium-term capital allocation plan.  Paying down debt is attributed just as much capital as the shareholder returns program.  The latter is no disaster and consistent with a 3%+ distribution per annum...but such is the burden when there is debt.

I will finalise my earnings / cash flow analysis when the full set of numbers comes out in a few weeks time but my broad instinct remains the US$22-28 range I talked about three months ago feels right - which equates to a mid single digit EV/ebit level to a high single digit one.  Which despite the share being down 6%+ makes it one to watch only at the moment.  

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