Goodyear Tire & Rubber Co Stock Shows Every Sign Of Being Significantly Overvalued
- By GF Value
The stock of Goodyear Tire & Rubber Co (NAS:GT, 30-year Financials) is believed to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $18.28 per share and the market cap of $4.3 billion, Goodyear Tire & Rubber Co stock gives every indication of being significantly overvalued. GF Value for Goodyear Tire & Rubber Co is shown in the chart below.
Because Goodyear Tire & Rubber Co is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Goodyear Tire & Rubber Co has a cash-to-debt ratio of 0.22, which is worse than 75% of the companies in Vehicles & Parts industry. The overall financial strength of Goodyear Tire & Rubber Co is 3 out of 10, which indicates that the financial strength of Goodyear Tire & Rubber Co is poor. This is the debt and cash of Goodyear Tire & Rubber Co over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Goodyear Tire & Rubber Co has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $12.8 billion and loss of $2.71 a share. Its operating margin is -1.69%, which ranks worse than 79% of the companies in Vehicles & Parts industry. Overall, GuruFocus ranks the profitability of Goodyear Tire & Rubber Co at 5 out of 10, which indicates fair profitability. This is the revenue and net income of Goodyear Tire & Rubber Co over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Goodyear Tire & Rubber Co's 3-year average revenue growth rate is worse than 71% of the companies in Vehicles & Parts industry. Goodyear Tire & Rubber Co's 3-year average EBITDA growth rate is -71.4%, which ranks in the bottom 10% of the companies in Vehicles & Parts industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Goodyear Tire & Rubber Co's ROIC is -1.73 while its WACC came in at 4.83. The historical ROIC vs WACC comparison of Goodyear Tire & Rubber Co is shown below:
In closing, Goodyear Tire & Rubber Co (NAS:GT, 30-year Financials) stock shows every sign of being significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Vehicles & Parts industry. To learn more about Goodyear Tire & Rubber Co stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
