Tires form an essential component of the automobile industry. With the shift toward green transportation, and changing dynamics of the auto sector, electric vehicle (EV) is the hottest trend right now. This has affected demand for traditional combustion vehicles to a large extent. However, EVs or combustion vehicles — both need tires to run. Thus, the demand for tires remains steady amid the transforming auto space.
Tire demand is divided into two segments — original equipment (OE) and replacement equipment (RE). Per IHS Markit, the OE segment accounts for roughly 25% of the global tire demand, while the RE segment accounts for the rest. The RE tire demand is crucial to the market’s growth as most tires depreciate pretty fast.
Per ResearchAndMarkets.com's report, the global tire market is poised to grow at an enhanced pace in the upcoming years, and will likely reach 2.7 billion units by 2025.
There is a solid demand for agricultural vehicle tires, driven by an increase in agrarian economies focused on mechanization. Also, the demand for construction tire, commercial vehicle tires and bus tires are rising owing to the surging investments in these sectors. These are some of the factors responsible for the boom in the tire industry. Moreover, the global tire market is driven by regular developments in tire engineering, especially breakthroughs in tire tread technology.
Given this encouraging backdrop, it is not a bad idea to undertake a comparative analysis of two prominent tire stocks — The Goodyear Tire Rubber Company GT and Cooper Tire Rubber Company CTB — with a market cap of $2.22 billion and $1.82 billion, respectively. Both stocks are part of the broader Zacks Rubber - Tires industry containing four stocks. Other players in the same industry are Bridgestone Corp BRDCY and Michelin MGDDY.
Let’s delve deeper into the fundamentals of Goodyear Tire and Cooper Tire to see which stock is better positioned. Both companies carry an attractive VGM score of A.
Battle on the Bourses
Cooper Tire clearly scores over Goodyear Tire in terms of price performance. Year to date, Cooper Tire has appreciated 27.6%, as against the broader industry’s decline of 20.2% as well as the S&P 500’s rally of 6.3%. However, Goodyear Tire has depreciated 38.1% during the same period.
Since automotive companies are debt laden, it makes sense to value these based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity, but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the impact of non-cash expenses.
Cooper Tire and Goodyear Tire have EV/EBITDA ratio for the trailing 12-month period of 5.32 and 3.85, respectively compared with the industry’s 4.32. Goodyear Tire has an edge, with a lower EV/EBITDA value and is a cheaper proposition.
The liquidity of a company is determined through quick ratio, which is a more stringent test to measure its capability to pay both short- and long-term obligations. Cooper Tire fares better than Goodyear Tire, with a liquidity ratio of 1.4, higher than Goodyear Tire’s 0.59. Cooper Tire also beats the broader industry’s liquidity ratio of 0.62.
Cooper Tire carries a total debt-to-capital ratio of 0.22, way lower than Goodyear Tire’s 0.67 and the industry’s level of 0.65. Consequently, Cooper Tire has an edge over Goodyear Tire in this parameter as well.
Last Quarter Performance and Projections
Cooper Tire reported second-quarter 2020 adjusted loss per share of 12 cents, narrower than the Zacks Consensus Estimate of a loss of 46 cents. However, the bottom line compared unfavorably with the earnings per share of 18 cents recorded in the prior-year quarter.
Goodyear Tire reported second-quarter 2020 adjusted loss per share of $1.87, narrower than the Zacks Consensus Estimate of a loss of $2.10. The bottom line, nonetheless, compared unfavorably with the earnings per share of 25 cents delivered in the year-ago period.
For Cooper Tire, the Zacks Consensus Estimate for fiscal 2020 earnings per share is pegged at $1.19, indicating a plunge of 37.7% year over year. However, the Zacks Consensus Estimate for fiscal 2021 earnings per share is pinned at $2.82, suggesting a year-over-year surge of 136.97%.
Meanwhile, for Goodyear Tire, the Consensus Mark for 2020 earnings per share is pinned at a loss of $2.37, calling for a slump of 320% year on year. Nevertheless, the Zacks Consensus Estimate for 2021 earnings per share is pegged at $0.51, indicating a jump of 121.35% from the year-earlier quarter.
In terms of capital expenditures for 2020, Cooper Tire estimates it to be at the higher end of the projected range of $140-160 million, while Goodyear Tire expects it to be around $700 million. Elevated spending amid the pandemic-induced uncertainty is likely to further dent the margins and cash flow of Goodyear Tire.
Earnings Surprise History
Earnings surprise history helps investors get an idea of a company’s performance in the previous quarters.
Over the trailing four quarter, Cooper Tire delivered an average earnings surprise of 47.39%, while Goodyear Tire posted an average negative earnings surprise of 46.9%. Thus, Cooper Tire clearly dominates Goodyear Tire with an excellent earnings record.
Cash Flow From Operations
Cooper Tire generated operating cash flow of $16.03 million in the first six months of 2020 comparing favorably to the negative cash flow of $99.16 million reported in the corresponding period of 2019. However, Goodyear Tire reported a negative cash flow from operations of $820 million comparing unfavorably with the negative cash flow of $291 million witnessed in the year-ago period.
Hence, over the last six months, Cooper Tire reported a sharp year-over-year increase in cash flow from operating activities, which is a key metric to gauge the financial health of the firm.
Our comparative analysis shows that Cooper Tire enjoys a dominant edge over Goodyear when considering share-price performance, leverage, liquidity, last quarter performance and projections; earnings surprise history and cash flow from operations. Goodyear Tire scores only on the valuation front.
Overall, Cooper Tire emerges as the clear winner here.
Remarkably, Cooper Tire currently flaunts a Zacks Rank #1 (Strong Buy), which underscores its robust fundamentals, while Goodyear Tire carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Just Released: Zacks’ 7 Best Stocks for Today
Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.3% per year.
These 7 were selected because of their superior potential for immediate breakout.
See these time-sensitive tickers now >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
The Goodyear Tire Rubber Company (GT) : Free Stock Analysis Report
Cooper Tire Rubber Company (CTB) : Free Stock Analysis Report
Bridgestone Corp. (BRDCY) : Free Stock Analysis Report
Michelin (MGDDY) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research