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The Goodyear Tire & Rubber

Co. (GT)
SELL/SHORT, TP $17.78 (-42.87%)

Research Team
Anurag Bansal
Austin Partridge
Hans Uy
Sunny Pamidimukkala

Table
of

Content
s

COMPANY

THESIS

VALUATION

RISKS

CONCLUSIO
N

Company Overview
One of the largest manufacturers of tires in the world

Revenue Breakdown
Latin America

10%

North America

Asia/Pacific

47%

12%

Europe, Middle East,


and Africa

31%

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Percentage of Inputs
A business heavily dependent on raw material prices

27
%

Natural
Rubber

14
%

Synthetic
Rubber

28
%

Carbon Black

31
%

Based on
rubber
commodity
prices

Based on
crude prices

Based on crude
prices

Steel,
Chemicals,
Fabric

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

Other

CONCLUSION

4.9.201

Stock Price History


40
35
30
25
20
15
10
5
0

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Bullish Market View


On the surface, the company seems to be growing
27.00%

2,400.0
2,300.0

25.00%
2,200.0
23.00%

2,100.0

18.7%
Asia/Pacific
Unit Sales Increase

2,000.0
21.00%
1,900.0
19.00%

1,800.0
1,700.0

17.00%
1,600.0
15.00%

2011

2012

EBITDA

C O M PA N Y

2013

2014

2015

1,500.0

$3.95
NTM Projected EPS
vs. 2015A EPS of $1.14

Gross Margins

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Investment Thesis
1
2
3

C O M PA N Y

Shifting consumer preferences


and
intense Asian competition have
led to company-wide contractions
Unsustainable gross margins due to alltime lows in input prices have covered up
stagnant revenue
Poor cash allocation and overly
optimistic
earnings targets provide negative
catalysts that
set the stock up for disappointment

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Poor Industry Positioning


Heavier OEM focus places Goodyear in the more stagnant
sector

Industry Breakdown
Other
Replacement Tires

3.4%

81.7%

OEM Tires

14.9%

= 69.4%

= 30.6%
Larger Portion of
Market Growth
Price Increasingly
Important
8

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Shifting Consumer Trends


Brand loyalty no longer locks in customers

Likelihood of switching brands when replacing


tires

60%

71%

Baby Boomers &


Pre-Boomers

Generation X & Y

6%
53%
9

C O M PA N Y

THESIS

VA LU AT I O N

Market
consumption share
growth rate
Percent of
consumption
RISKS

CONCLUSION

4.9.201

Market Share Decline


Goodyears growth has significantly underperformed the
industry
Goodyear US Market Share

GT vs US Industry Revenue Growth


0.00%

2012

2013

2014

2015

21.0%
20.0%

-2.00%

19.0%

-4.00%
-6.00%

18.0%

-8.00%

17.0%

-10.00%

16.0%

-12.00%

15.0%
Goodyear

10

C O M PA N Y

Industry

THESIS

VA LU AT I O N

2010 2011 2012 2013 2014 2015

RISKS

CONCLUSION

4.9.201

Price Points
Goodyear is being heavily undercut by low-cost Asian
manufacturers
Average Tire Price Per Model

$230.00
$210.00
$190.00
$170.00
$150.00
$130.00
$110.00
$90.00
$70.00

Major Brands

Low-Cost Brands

Major Brands

Low-Cost Brands

21%
cheaper

11

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Operational Inefficiency
Competitors far outpace Goodyears margins and profitability

LTM Gross Margin


40.00%
38.00%

~10%

36.00%
34.00%
32.00%

Gross Margin
Disadvantage

30.00%
28.00%
26.00%
24.00%
22.00%

12

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Input Prices
The company has significant exposure to commodity pricing
Natural Rubber

Crude Derived

69%

of total COGS

Natural/Synthetic Price Ratio


9500.00%
9000.00%
8500.00%
8000.00%
7500.00%
7000.00%
6500.00%
6000.00%
5500.00%
5000.00%

13

C O M PA N Y

Tire manufacturers
are benefitting far more
from lower natural rubber
prices
than synthetic

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Natural Rubber Producers


Rubber is incredibly concentrated in SE Asia

Thailand, Malaysia, and


Indonesia form the International
Tripartite Rubber Organization
Combined with Vietnam, they

80%

produce
of the worlds rubber

Higher
Higher
Transpo + Storage +
rt Costs
Costs

14

C O M PA N Y

THESIS

Higher
Labor
Costs

VA LU AT I O N

Lower Margins
than
Competitors

RISKS

CONCLUSION

4.9.201

Rubber Prices
Catalysts for price increases are already playing out
550

Natural Rubber #3 (TOCOM) Pricing

500
450

JPY per kg

400
350

ITRO + Vietnam have


decided to cut
production by 615,000
tons over the next six
months
Inventories will begin
to drop low levels

300

2M Tons

250
200
150

Analysts have
predicted sharp
price increases at
this level

100

15

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Rubber Inventories
Declining rubber reserves point to drastically higher prices
4500

Historical Inventories

Projected Inventories

Thousands of metric tonnes

4000
3500
3000
2500
2000
1500
1000

Q4 '13 Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16 Q1 '17
Natural Rubber

16

C O M PA N Y

THESIS

Synthetic Rubber

Projected NR

VA LU AT I O N

Projected SR

RISKS

CONCLUSION

4.9.201

Gross Margin Impact


Low inventories Supply Shock Goodyear Margin Decline

Loss of Market Share +


Revenue Decline in
US & EMEA

Decrease in production
+ inventories leads to
increasing
natural
rubber
prices

Margin
Compres
sion

Gross Margin Projections

27.00%
25.00%
23.00%
21.00%
19.00%
17.00%
15.00%

17

2012

C O M PA N Y

2013

2014

THESIS

2015

2016E

VA LU AT I O N

2017E

RISKS

2018E

2019E

2020E

CONCLUSION

4.9.201

Weak Balance Sheet


Accelerated debt maturation due to refinancing inhibits shortterm growth

The increase in long term debt and capital leases due within one year
was due primarily to the 250 million 6.75% senior notes due 2019
being classified as current at December 31, 2015 in connection with the
irrevocable call for their redemption -inGoodyear
January
2016
2015
10K

Current Portion of LT

Equity Research Calls

Debt
700

$400MM
increase

500
400

millions

600

300

Heavy Debt
Refinancing

Higher ST Debt
Repayments

200
100
0

18

C O M PA N Y

THESIS

VA LU AT I O N

2012

RISKS

2013

2014

2015

CONCLUSION

4.9.201

Weak Balance Sheet


Unsustainable leverage will bring further liquidity issues
Even after a net $1B reduction in debt last year
D/E Ratios
300.0%
250.0%
200.0%
150.0%
100.0%
50.0%
0.0%

Q1 2014

Q2 2014

Goodyear

Q3 2014

Q4 2014

Q1 2015

Q2 2015

Cooper

Michelin

Bridgestone

Q3 2015

Q4 2015

Sumitomo

Goodyear still has the highest D/E ratio in the industry by far

19

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Unfunded Pension Liability


Past obligations continue to hamper the company

December 31

April 30

2013

2014

$1.15
Billion

C O M PA N Y

2015
$642
Million

Management
authorizes full
pension freeze

Unfunded
Pension
Liability

20

December 31

Unfunded
Pension
Liability

No new
employees will
receive
benefits

THESIS

VA LU AT I O N

Must be paid
off
by 2018

RISKS

CONCLUSION

4.9.201

Poor Cash Allocation


New share repurchase program diverts much needed cash

Cash and Cash Equivalents

millions

3000

3500

2500

Any

2000

$1.5B
decrease
disruption
in cash

21

$413
million
in share
buybacks

flows from operations will


render
debt refinancings and share repurchases
unattainable and 2016 2018
provoke negative market $1.1
reaction
billion

1500

1000

Since 2013

increase in
buyback authorization
2013

C O M PA N Y

2014

THESIS

2015

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Inflated Expectations
Overly bullish estimates are setting the company up for
disappointment

Goodyear Historical EPS

2015
Actual
EPS
Used all their
NOL
Carryforwards

$1.12

$10.00
$8.00
$6.00
$3.95

$4.00

2016 Necessary
Earnings Increase

2.5x

$2.00
$-

2010

2011

2012

2013

2014

2015

Highly Unlikely

$(2.00)

22

C O M PA N Y

2016

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Comparables Analysis
Trailing P/E

Forward P/E

P/BV

NTM
EV/EBITDA

NTM EPS

48,909.6

14.33x

12.65x

8.1x

6.5x

17.51

28,230.9

27,402.9

11.15x

9.65x

1.5x

4.1x

3.74

100.55

18,242.2

19,705.8

14.07x

10.94x

2.0x

4.4x

9.19

1.98

6,426.6

7,406.3

16.24x

14.12x

2.5x

7.6x

0.14

Sumitomo Rubber Industries Ltd. (TSE:5110)

15.06

3,951.7

6,062.9

7.94x

7.91x

1.2x

5.2x

1.91

The Yokohama Rubber Company, Limited (TSE:5101)

15.71

2,519.7

3,894.8

7.80x

8.55x

0.9x

4.9x

1.84

Cooper Tire & Rubber Co. (NYSE:CTB)

36.23

2,011.7

1,854.4

9.82x

9.37x

2.4x

3.8x

3.87

Hankook Tire Worldwide Co., Ltd. (KOSE:A000240)

19.11

1,752.2

NM

9.92x

11.14x

0.9x

NM

1.72

7.27

1,148.6

3,303.5

NM

15.78x

1.2x

8.2x

0.46

32.49

8,682.5

13,184.5

10.85x

8.42x

2.7x

5.0x

3.86

Company Name
Continental Aktiengesellschaft (DB:CON)
Bridgestone Corp. (TSE:5108)
Compagnie Generale DES Etablissements Michelin SCA
(ENXTPA:ML)
Cheng Shin Rubber Industries Co. Ltd. (TSEC:2105)

Kumho Tire Co., Inc. (KOSE:A073240)

Share
Price

Market Cap

221.52

44,306.5

36.04

EV

The Goodyear Tire & Rubber Company (NasdaqGS:GT)

23

MIN

2.0

1,148.6

1,854.4

7.8x

7.9x

0.9x

3.8x

0.14

MEAN

48.6

11,727.3

14,636.1

11.3x

10.9x

2.3x

5.5x

4.42

MED

25.8

5,189.2

7,406.3

10.9x

10.3x

1.8x

5.0x

2.83

MAX

221.5

44,306.5

48,909.6

16.2x

15.8x

8.1x

8.2x

17.51

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Intrinsic Valuation
Discounted Cash Flow Analysis
($ in millions, Fiscal Year ends December 31)

Historical

Revenue

COGS % of Revenue
Gross Profit
% Margin
Less: SG&A
SG&A % of Revenue

24

Projected

2012

2013

2014

2015

2016E

2017E

2018E

2019E

2020E

20992.0

19540.0

18138.0

16443.0

15676.4

15222.7

15055.1

14983.5

15037.7

-6.92%

-7.18%

-9.35%

-4.66%

-2.89%

-1.10%

-0.48%

0.36%

17142.0

15372.0

13899.0

12156.0

11795.4

11914.7

11989.8

12064.6

12125.5

81.66%

78.67%

76.63%

73.93%

75.24%

78.27%

79.64%

80.52%

80.63%

3850.0

4168.0

4239.0

4287.0

3881.0

3308.0

3065.3

2918.9

2912.2

18.34%

21.33%

23.37%

26.07%

24.76%

21.73%

20.36%

19.48%

19.37%

2031.0
9.68%

2036.0
10.42%

1988.0
10.96%

1951.0
11.87%

1906.3
12.16%

1883.0
12.37%

1927.0
12.80%

1944.9
12.98%

1956.4
13.01%

% Growth
Less: COGS

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Intrinsic Valuation

Historical

EBITDA
% Margin
Less: D&A
D&A % of Revenue
EBIT
% Margin
Less: Tax Expense
(38.16%)
NOPAT
Plus: D&A
Less: CapEx
CapEx % of
Revenue
Less: Change in NWC

Projected

2012

2013

2014

2015

2016E

2017E

2018E

2019E

2020E

1819.0

2132.0

2251.0

2336.0

1974.8

1424.9

1138.2

974.0

955.8

8.67%

10.91%

12.41%

14.21%

12.60%

9.36%

7.56%

6.50%

6.36%

687.0

722.0

732.0

698.0

682.4

716.4

731.5

741.9

747.7

3.27%

3.69%

4.04%

4.24%

4.35%

4.71%

4.86%

4.95%

4.97%

1132.0

1410.0

1519.0

1638.0

1292.4

708.5

406.7

232.1

208.1

5.39%

7.22%

8.37%

9.96%

8.24%

4.65%

2.70%

1.55%

1.38%

203.0

538.1

579.7

625.1

0.0

0.0

0.0

0.0

0.0

929.0

871.9

939.3

1012.9

1292.4

708.5

406.7

232.1

208.1

687.0

722.0

732.0

698.0

682.4

716.4

731.5

741.9

747.7

1127.0

1168.0

923.0

983.0

1019.0

864.9

833.1

797.1

765.4

5.37%

5.98%

5.09%

5.98%

6.50%

5.68%

5.53%

5.32%

5.09%

-430.0

-383.0

-264.0

-102.0

106.7

-27.2

-24.1

-11.1

2.4

Unlevered FCF
25
C O M P A N Y919.0

T808.9
H E S I S 1012.3 V A L829.9
U A T I O N

849.1 R I S 587.3
KS

329.3
188.0
CONCLU
SION

4.9.201
187.9

Intrinsic Valuation
Capital Market Assumptions
Market Return
Risk-Free Rate
Beta
Cost of Equity
Cost of Debt (Tax
Adjusted)

% Equity
% Debt

WACC

Tax Rate

EV/EBITDA Exit Multiple

Terminal Value

$5,348.88

11.06%
1.94%
1.064
11.64%

PV of FCF

$1,798.05

6.28%

60.2%
39.8%

8.55%

38.16%

5.60x

Implied EV

$5,346.31

PV of Terminal Value

$3,548.26

Terminal Value/EV

66.37%

Net Debt

$594.00

Implied Market Cap

$4,752.31

Shares Outstanding

267.24

Intrinsic Value Per Share

$17.78

Current share price

$31.13

Implied discount

-42.87%

WACC

EV/EBITDA

26

-42.87%
8.60
7.60
6.60
5.60
4.60
3.60
2.60

C O M PA N Y

11.55%
-29.49%
-36.14%
-42.80%
-49.47%
-56.10%
-62.75%
-69.40%

THESIS

10.55%
-26.48%
-33.44%
-40.40%
-47.38%
-54.31%
-61.27%
-68.23%

9.55%
-23.31%
-30.59%
-37.87%
-45.18%
-52.43%
-59.71%
-67.00%

VA LU AT I O N

8.55%
-19.98%
-27.60%
-35.22%
-42.87%
-50.47%
-58.09%
-65.71%

7.55%
-16.44%
-24.42%
-32.41%
-40.42%
-48.38%
-56.36%
-64.35%

RISKS

6.55%
-12.72%
-21.09%
-29.46%
-37.85%
-46.19%
-54.55%
-62.92%

CONCLUSION

4.9.201

Base/Bull/Bear Cases
$42.00
$37.00

$34.46 (+10.31%)

$32.00
$27.00
$22.00

$17.78 (-43.08%)

$17.00
$12.00

$8.19 (-73.78%)

$7.00

27

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Risks and Mitigants


Low Cost Market
Penetration

Rubber Prod. Limits


Removed

Additional Debt
Infusion

Key Takeaway
Any potential upside
is simply too little
to
Management is
Rubber producing
committed to reducing
been
reverse the acreage
majorhasobstacles
facing
debt
slashed due to
Goodyear
oversupply; couldnt

Brand image as a high


quality tire
manufacturer is too
locked in
Cost of operational
changes is far too
prohibitive

Top 4 rubber producing


countries signed an
agreement to not
eliminate these quotas

Still cant compete


against Asian tire
manufacturers lower
costs

28

C O M PA N Y

Excessive leverage
raises cost of debt;
defeats the purpose of
refinancing

increase production
even if they wanted to

THESIS

VA LU AT I O N

Out of $8B in existing


credit arrangements,
only $2B remains
unused

RISKS

CONCLUSION

4.9.201

Negative Catalysts
Goodyear faces many obstacles that should send the stock
tumbling
Continued revenue decline due to intense competition and market
share loss
Margin compression from input price recovery reduces earnings and
cash flow

jor earnings disappointments; cant meet overly optimistic consensus NTM EPS
10Q

10Q

10Q

10K

10Q

Analyst downgrades, major


selloff

29

C O M PA N Y

8
Months Since Investment

THESIS

VA LU AT I O N

RISKS

12

16

CONCLUSION

4.9.201

Trading Considerations
Investment recommendation is a very feasible short position

Investment Horizon
Float

8 16 Months
99.6%

Short % of Float
Borrow Rate

6.4%
0.25% (+0.90% Div Yield)

Days to Cover

4.83

Monitor to Maintain Exit Strategy

30

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

The Goodyear Tire & Rubber


Co. (GT)
SELL/SHORT, TP $17.78 (-42.87%)

APPENDIX

31

4.9.201

Appendix Contents
72.Revenue Projections (Base) 92.Shifting Consumer Trends
73.Revenue Projections (Bull)
93.Comparative Pricing
74.Revenue Projections (Bear)
94.China Top Tiremakers
75.COGS Projections (Base)
95.China Tire Production Forecast
76.COGS Projections (Bull)
96.US Tire Trade Balance
77.COGS Projections (Bear)
97.Imports by Country
78.Depreciation Schedule
98.US Tire Industry Breakdown
79.Amortization Schedule
99.Tire Locations Sources
80.Working Capital Assumptions 100.Rubber Shipments
81.Change in NWC Calculations 101.Rubber Pricing
82.Beta Calculation
102.Natural Rubber Production
83.Income Statement
103.Synthetic Rubber Production
84.Balance Sheet
104.Tire Materials Percentage
85.Cash Flow Statement (Ops) 105.Unfunded Pension 2013
86.Cash Flow Statement (Inv&Fin)106.Unfunded Pension 2014
87.Debt Outstanding
107.Unfunded Pension 2015
88.Properties
108.Share Repurchases
89.Revenue Breakdown
90.Top Shareholders
91.Short Interest
32

4.9.201

The Goodyear Tire & Rubber


Co. (GT)
SELL/SHORT, TP $17.78 (-42.87%)

Research Team
Anurag Bansal
Austin Partridge
Hans Uy
Sunny Pamidimukkala

33

4.9.201

Table
of

Content
s

COMPANY

THESIS

VALUATION

RISKS

CONCLUSIO
N

4.9.201

Company Overview
One of the largest manufacturers of tires in the world

Revenue Breakdown
Latin America

10%

North America

Asia/Pacific

47%

12%

Europe, Middle East,


and Africa

31%

35

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Percentage of Inputs
A business heavily dependent on raw material prices

27
%

36

Natural
Rubber

14
%

Synthetic
Rubber

28
%

Carbon Black

31
%

Based on
rubber
commodity
prices

Based on
crude prices

Based on crude
prices

Steel,
Chemicals,
Fabric

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

Other

CONCLUSION

4.9.201

Stock Price History


40
35
30
25
20
15
10
5
0

37

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Bullish Market View


On the surface, the company seems to be growing
27.00%

2,400.0
2,300.0

25.00%
2,200.0
23.00%

2,100.0

18.7%
Asia/Pacific
Unit Sales Increase

2,000.0
21.00%
1,900.0
19.00%

1,800.0
1,700.0

17.00%
1,600.0
15.00%

2011

2012

EBITDA

38

C O M PA N Y

2013

2014

2015

1,500.0

$3.95
NTM Projected EPS
vs. 2015A EPS of $1.14

Gross Margins

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Investment Thesis
1
2
3

39

C O M PA N Y

Shifting consumer preferences


and
intense Asian competition have
led to company-wide contractions
Unsustainable gross margins due to alltime lows in input prices have covered up
stagnant revenue
Poor cash allocation and overly
optimistic
earnings targets provide negative
catalysts that
set the stock up for disappointment

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Poor Industry Positioning


Heavier OEM focus places Goodyear in the more stagnant
sector

Industry Breakdown
Other
Replacement Tires

3.4%

81.7%

OEM Tires

14.9%

= 69.4%

= 30.6%
Larger Portion of
Market Growth
Price Increasingly
Important
40

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Shifting Consumer Trends


Brand loyalty no longer locks in customers

Likelihood of switching brands when replacing


tires

60%

71%

Baby Boomers &


Pre-Boomers

Generation X & Y

6%
53%
41

C O M PA N Y

THESIS

VA LU AT I O N

Market
consumption share
growth rate
Percent of
consumption
RISKS

CONCLUSION

4.9.201

Market Share Decline


Goodyears growth has significantly underperformed the
industry
Goodyear US Market Share

GT vs US Industry Revenue Growth


0.00%

2012

2013

2014

2015

21.0%
20.0%

-2.00%

19.0%

-4.00%
-6.00%

18.0%

-8.00%

17.0%

-10.00%

16.0%

-12.00%

15.0%
Goodyear

42

C O M PA N Y

Industry

THESIS

VA LU AT I O N

2010 2011 2012 2013 2014 2015

RISKS

CONCLUSION

4.9.201

Price Points
Goodyear is being heavily undercut by low-cost Asian
manufacturers
Average Tire Price Per Model

$230.00
$210.00
$190.00
$170.00
$150.00
$130.00
$110.00
$90.00
$70.00

Major Brands

Low-Cost Brands

Major Brands

Low-Cost Brands

21%
cheaper

43

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Operational Inefficiency
Competitors far outpace Goodyears margins and profitability

LTM Gross Margin


40.00%
38.00%

~10%

36.00%
34.00%
32.00%

Gross Margin
Disadvantage

30.00%
28.00%
26.00%
24.00%
22.00%

44

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Input Prices
The company has significant exposure to commodity pricing
Natural Rubber

Crude Derived

69%

of total COGS

Natural/Synthetic Price Ratio


9500.00%
9000.00%
8500.00%
8000.00%
7500.00%
7000.00%
6500.00%
6000.00%
5500.00%
5000.00%

45

C O M PA N Y

Tire manufacturers
are benefitting far more
from lower natural rubber
prices
than synthetic

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Natural Rubber Producers


Rubber is incredibly concentrated in SE Asia

Thailand, Malaysia, and


Indonesia form the International
Tripartite Rubber Organization
Combined with Vietnam, they

80%

produce
of the worlds rubber

Higher
Higher
Transpo + Storage +
rt Costs
Costs

46

C O M PA N Y

THESIS

Higher
Labor
Costs

VA LU AT I O N

Lower Margins
than
Competitors

RISKS

CONCLUSION

4.9.201

Manufacturing Capacity
Goodyear faces higher transportation costs due to plant
positioning

Goodyear
19
Michelin 14
Continental 11

Goodyear 9
Michelin 37
Continental 14

Goodyear 6
Michelin 7
Continental 10

Goodyear
6
Michelin 2
Continental 5

47

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Manufacturing Capacity
Asian competitors benefit from geographical factors

Yokohama 3
Hankook 1
Bridgestone
40
Sumitomo - 2

Yokohama 1
Hankook 1
Bridgestone
15
Sumitomo - 7

Yokohama 17
Hankook 6
Bridgestone
96
Sumitomo - 14

Yokohama 0
Hankook 0
Bridgestone
16
Sumitomo - 2

48

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Rubber Prices
Catalysts for price increases are already playing out
550

Natural Rubber #3 (TOCOM) Pricing

500
450

JPY per kg

400
350

ITRO + Vietnam have


decided to cut
production by 615,000
tons over the next six
months
Inventories will begin
to drop low levels

300

2M Tons

250
200
150

Analysts have
predicted sharp
price increases at
this level

100

49

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Rubber Inventories
Declining rubber reserves point to drastically higher prices
4500

Historical Inventories

Projected Inventories

Thousands of metric tonnes

4000
3500
3000
2500
2000
1500
1000

Q4 '13 Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16 Q1 '17
Natural Rubber

50

C O M PA N Y

THESIS

Synthetic Rubber

Projected NR

VA LU AT I O N

Projected SR

RISKS

CONCLUSION

4.9.201

Gross Margin Impact


Low inventories Supply Shock Goodyear Margin Decline

Loss of Market Share +


Revenue Decline in
US & EMEA

Decrease in production
+ inventories leads to
increasing
natural
rubber
prices

Margin
Compres
sion

Gross Margin Projections

27.00%
25.00%
23.00%
21.00%
19.00%
17.00%
15.00%

51

2012

C O M PA N Y

2013

2014

THESIS

2015

2016E

VA LU AT I O N

2017E

RISKS

2018E

2019E

2020E

CONCLUSION

4.9.201

Weak Balance Sheet


Accelerated debt maturation due to refinancing inhibits shortterm growth

The increase in long term debt and capital leases due within one year
was due primarily to the 250 million 6.75% senior notes due 2019
being classified as current at December 31, 2015 in connection with the
irrevocable call for their redemption -inGoodyear
January
2016
2015
10K

Current Portion of LT

Equity Research Calls

Debt
700

$400MM
increase

500
400

millions

600

300

Heavy Debt
Refinancing

Higher ST Debt
Repayments

200
100
0

52

C O M PA N Y

THESIS

VA LU AT I O N

2012

RISKS

2013

2014

2015

CONCLUSION

4.9.201

Weak Balance Sheet


Unsustainable leverage will bring further liquidity issues
Even after a net $1B reduction in debt last year
D/E Ratios
300.0%
250.0%
200.0%
150.0%
100.0%
50.0%
0.0%

Q1 2014

Q2 2014

Goodyear

Q3 2014

Q4 2014

Q1 2015

Q2 2015

Cooper

Michelin

Bridgestone

Q3 2015

Q4 2015

Sumitomo

Goodyear still has the highest D/E ratio in the industry by far

53

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Unfunded Pension Liability


Past obligations continue to hamper the company

December 31

April 30

2013

2014

$1.15
Billion

C O M PA N Y

2015
$642
Million

Management
authorizes full
pension freeze

Unfunded
Pension
Liability

54

December 31

Unfunded
Pension
Liability

No new
employees will
receive
benefits

THESIS

VA LU AT I O N

Must be paid
off
by 2018

RISKS

CONCLUSION

4.9.201

Poor Cash Allocation


New share repurchase program diverts much needed cash

Cash and Cash Equivalents

millions

3000

3500

2500

Any

2000

$1.5B
decrease
disruption
in cash

55

$413
million
in share
buybacks

flows from operations will


render
debt refinancings and share repurchases
unattainable and 2016 2018
provoke negative market $1.1
reaction
billion

1500

1000

Since 2013

increase in
buyback authorization
2013

C O M PA N Y

2014

THESIS

2015

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Inflated Expectations
Overly bullish estimates are setting the company up for
disappointment

Goodyear Historical EPS

2015
Actual
EPS
Used all their
NOL
Carryforwards

$1.12

$10.00
$8.00
$6.00
$3.95

$4.00

2016 Necessary
Earnings Increase

2.5x

$2.00
$-

2010

2011

2012

2013

2014

2015

Highly Unlikely

$(2.00)

56

C O M PA N Y

2016

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Comparables Analysis
Trailing P/E

Forward P/E

P/BV

NTM
EV/EBITDA

NTM EPS

48,909.6

14.33x

12.65x

8.1x

6.5x

17.51

28,230.9

27,402.9

11.15x

9.65x

1.5x

4.1x

3.74

100.55

18,242.2

19,705.8

14.07x

10.94x

2.0x

4.4x

9.19

1.98

6,426.6

7,406.3

16.24x

14.12x

2.5x

7.6x

0.14

Sumitomo Rubber Industries Ltd. (TSE:5110)

15.06

3,951.7

6,062.9

7.94x

7.91x

1.2x

5.2x

1.91

The Yokohama Rubber Company, Limited (TSE:5101)

15.71

2,519.7

3,894.8

7.80x

8.55x

0.9x

4.9x

1.84

Cooper Tire & Rubber Co. (NYSE:CTB)

36.23

2,011.7

1,854.4

9.82x

9.37x

2.4x

3.8x

3.87

Hankook Tire Worldwide Co., Ltd. (KOSE:A000240)

19.11

1,752.2

NM

9.92x

11.14x

0.9x

NM

1.72

7.27

1,148.6

3,303.5

NM

15.78x

1.2x

8.2x

0.46

32.49

8,682.5

13,184.5

10.85x

8.42x

2.7x

5.0x

3.86

Company Name
Continental Aktiengesellschaft (DB:CON)
Bridgestone Corp. (TSE:5108)
Compagnie Generale DES Etablissements Michelin SCA
(ENXTPA:ML)
Cheng Shin Rubber Industries Co. Ltd. (TSEC:2105)

Kumho Tire Co., Inc. (KOSE:A073240)

Share
Price

Market Cap

221.52

44,306.5

36.04

EV

The Goodyear Tire & Rubber Company (NasdaqGS:GT)

57

MIN

2.0

1,148.6

1,854.4

7.8x

7.9x

0.9x

3.8x

0.14

MEAN

48.6

11,727.3

14,636.1

11.3x

10.9x

2.3x

5.5x

4.42

MED

25.8

5,189.2

7,406.3

10.9x

10.3x

1.8x

5.0x

2.83

MAX

221.5

44,306.5

48,909.6

16.2x

15.8x

8.1x

8.2x

17.51

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Intrinsic Valuation
Discounted Cash Flow Analysis
($ in millions, Fiscal Year ends December 31)

Historical

Revenue

COGS % of Revenue
Gross Profit
% Margin
Less: SG&A
SG&A % of Revenue

58

Projected

2012

2013

2014

2015

2016E

2017E

2018E

2019E

2020E

20992.0

19540.0

18138.0

16443.0

15676.4

15222.7

15055.1

14983.5

15037.7

-6.92%

-7.18%

-9.35%

-4.66%

-2.89%

-1.10%

-0.48%

0.36%

17142.0

15372.0

13899.0

12156.0

11795.4

11914.7

11989.8

12064.6

12125.5

81.66%

78.67%

76.63%

73.93%

75.24%

78.27%

79.64%

80.52%

80.63%

3850.0

4168.0

4239.0

4287.0

3881.0

3308.0

3065.3

2918.9

2912.2

18.34%

21.33%

23.37%

26.07%

24.76%

21.73%

20.36%

19.48%

19.37%

2031.0
9.68%

2036.0
10.42%

1988.0
10.96%

1951.0
11.87%

1906.3
12.16%

1883.0
12.37%

1927.0
12.80%

1944.9
12.98%

1956.4
13.01%

% Growth
Less: COGS

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Intrinsic Valuation

Historical

EBITDA
% Margin
Less: D&A
D&A % of Revenue
EBIT
% Margin
Less: Tax Expense
(38.16%)
NOPAT
Plus: D&A
Less: CapEx
CapEx % of
Revenue
Less: Change in NWC

Projected

2012

2013

2014

2015

2016E

2017E

2018E

2019E

2020E

1819.0

2132.0

2251.0

2336.0

1974.8

1424.9

1138.2

974.0

955.8

8.67%

10.91%

12.41%

14.21%

12.60%

9.36%

7.56%

6.50%

6.36%

687.0

722.0

732.0

698.0

682.4

716.4

731.5

741.9

747.7

3.27%

3.69%

4.04%

4.24%

4.35%

4.71%

4.86%

4.95%

4.97%

1132.0

1410.0

1519.0

1638.0

1292.4

708.5

406.7

232.1

208.1

5.39%

7.22%

8.37%

9.96%

8.24%

4.65%

2.70%

1.55%

1.38%

203.0

538.1

579.7

625.1

0.0

0.0

0.0

0.0

0.0

929.0

871.9

939.3

1012.9

1292.4

708.5

406.7

232.1

208.1

687.0

722.0

732.0

698.0

682.4

716.4

731.5

741.9

747.7

1127.0

1168.0

923.0

983.0

1019.0

864.9

833.1

797.1

765.4

5.37%

5.98%

5.09%

5.98%

6.50%

5.68%

5.53%

5.32%

5.09%

-430.0

-383.0

-264.0

-102.0

106.7

-27.2

-24.1

-11.1

2.4

Unlevered FCF
59
C O M P A N Y919.0

T808.9
H E S I S 1012.3 V A L829.9
U A T I O N

849.1 R I S 587.3
KS

329.3
188.0
CONCLU
SION

4.9.201
187.9

Intrinsic Valuation
Capital Market Assumptions
Market Return
Risk-Free Rate
Beta
Cost of Equity
Cost of Debt (Tax
Adjusted)

% Equity
% Debt

WACC

Tax Rate

EV/EBITDA Exit Multiple

Terminal Value

$5,348.88

11.06%
1.94%
1.064
11.64%

PV of FCF

$1,798.05

6.28%

60.2%
39.8%

8.55%

38.16%

5.60x

Implied EV

$5,346.31

PV of Terminal Value

$3,548.26

Terminal Value/EV

66.37%

Net Debt

$594.00

Implied Market Cap

$4,752.31

Shares Outstanding

267.24

Intrinsic Value Per Share

$17.78

Current share price

$31.13

Implied discount

-42.87%

WACC

EV/EBITDA

60

-42.87%
8.60
7.60
6.60
5.60
4.60
3.60
2.60

C O M PA N Y

11.55%
-29.49%
-36.14%
-42.80%
-49.47%
-56.10%
-62.75%
-69.40%

THESIS

10.55%
-26.48%
-33.44%
-40.40%
-47.38%
-54.31%
-61.27%
-68.23%

9.55%
-23.31%
-30.59%
-37.87%
-45.18%
-52.43%
-59.71%
-67.00%

VA LU AT I O N

8.55%
-19.98%
-27.60%
-35.22%
-42.87%
-50.47%
-58.09%
-65.71%

7.55%
-16.44%
-24.42%
-32.41%
-40.42%
-48.38%
-56.36%
-64.35%

RISKS

6.55%
-12.72%
-21.09%
-29.46%
-37.85%
-46.19%
-54.55%
-62.92%

CONCLUSION

4.9.201

Base/Bull/Bear Cases
$42.00
$37.00

$34.46 (+10.31%)

$32.00
$27.00
$22.00

$17.78 (-43.08%)

$17.00
$12.00

$8.19 (-73.78%)

$7.00

61

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Base/Bull/Bear Assumptions
Bear

Base

Bull

Market
Share

Heavy Losses

Marginal Losses

Stable

Natural
Rubber

Price Increases

Price Increases

Price Decreases

Crude
Oil

Price Increases

Price Stable

Price Decreases

62

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Risks & Mitigants


LOW COST MARKET PENETRATION

odyear could shift more towards the price-sensitive replacement market


HOWEVER

Brand image as a high quality tire manufacturer is too locked in

Costs associated with shifting product line would be very high

Still cant compete against low-cost Asian tire manufacturers

63

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Risks & Mitigants


RUBBER PRODUCTION LIMITS

ey rubber producers could eliminate established production quotas


HOWEVER

Rubber producing acreage has been slashed due to oversupply

Farmers couldnt increase production even if they wanted to

p 4 producing countries signed an agreement to uphold these quotas

64

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Risks & Mitigants


ADDITIONAL DEBT INFUSION

anagement could fund obligations with a major increase in leverage


HOWEVER

Management is committed to reducing deb

cessive leverage raises cost of debt; defeats the purpose of refinancin

Out of $8B in existing credit facilities, only $2B remains unused

65

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Risks & Mitigants

Key Takeaway
Any potential upside is simply too little to
reverse the major obstacles facing
Goodyear

66

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Conclusion
A multitude of red flags points to an imminent drop in stock
price
Poor industry positioning
Pronounced market share deterioration
Intense competition undercuts price points
Rising input prices in the near future
Excessive leverage
Unfunded pension liability
Aggressive and imprudent share repurchase program

67

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

Negative Catalysts
Goodyear faces many obstacles that should send the stock
tumbling
Continued revenue decline due to intense competition and market
share loss
Margin compression from input price recovery reduces earnings and
cash flow

jor earnings disappointments; cant meet overly optimistic consensus NTM EPS
10Q

10Q

10Q

10K

10Q

Analyst downgrades, major


selloff

68

C O M PA N Y

8
Months Since Investment

THESIS

VA LU AT I O N

RISKS

12

16

CONCLUSION

4.9.201

Trading Considerations
Investment recommendation is a very feasible short position

Investment Horizon
Float

8 16 Months
99.6%

Short % of Float
Borrow Rate

6.4%
0.25% (+0.90% Div Yield)

Days to Cover

4.83

Monitor to Maintain Exit Strategy

69

C O M PA N Y

THESIS

VA LU AT I O N

RISKS

CONCLUSION

4.9.201

The Goodyear Tire & Rubber


Co. (GT)
SELL/SHORT, TP $17.78 (-42.87%)

APPENDIX

70

4.9.201

Appendix Contents
72.Revenue Projections (Base) 92.Shifting Consumer Trends
73.Revenue Projections (Bull)
93.Comparative Pricing
74.Revenue Projections (Bear)
94.China Top Tiremakers
75.COGS Projections (Base)
95.China Tire Production Forecast
76.COGS Projections (Bull)
96.US Tire Trade Balance
77.COGS Projections (Bear)
97.Imports by Country
78.Depreciation Schedule
98.US Tire Industry Breakdown
79.Amortization Schedule
99.Tire Locations Sources
80.Working Capital Assumptions 100.Rubber Shipments
81.Change in NWC Calculations 101.Rubber Pricing
82.Beta Calculation
102.Natural Rubber Production
83.Income Statement
103.Synthetic Rubber Production
84.Balance Sheet
104.Tire Materials Percentage
85.Cash Flow Statement (Ops) 105.Unfunded Pension 2013
86.Cash Flow Statement (Inv&Fin)106.Unfunded Pension 2014
87.Debt Outstanding
107.Unfunded Pension 2015
88.Properties
108.Share Repurchases
89.Revenue Breakdown
90.Top Shareholders
91.Short Interest
71

4.9.201

Revenue Projections (Base)

72

4.9.201

Revenue Projections (Bull)

73

4.9.201

Revenue Projections (Bear)

74

4.9.201

COGS Projections (Base)

75

4.9.201

COGS Projections (Bull)

76

4.9.201

COGS Projections (Bear)

77

4.9.201

Depreciation Schedule

78

4.9.201

Amortization Schedule

79

4.9.201

Working Capital Assumptions

80

4.9.201

Change in NWC Calculations

81

4.9.201

Beta Calculation

82

4.9.201

Income Statement

83

4.9.201

Balance Sheet

84

4.9.201

Cash Flow Statement (Ops)

85

4.9.201

Cash Flow Statement


(Inv&Fin)

86

4.9.201

Debt Outstanding

87

4.9.201

Properties

88

4.9.201

Revenue Breakdown

# of tires

89

4.9.201

Top Shareholders

90

4.9.201

Short Interest

91

4.9.201

Shifting Consumer Trends

92

4.9.201

Comparative Pricing

93

4.9.201

China Top Tiremakers

4.9.201

China Tire Production


Forecast

4.9.201

US Tire Trade Balance

4.9.201

Imports by Country

4.9.201

US Tire Industry Breakdown

4.9.201

Tire Locations Sources


Yokohama Continental http://global.yokohamatire.net/corpor
http://www.continentalate/overseasmanufacturingfacilities.h
corporation.com/www/portal_com_en/
tml
themes/continental/continental_globa
l/
Michelin http://www.michelin.com/eng/micheli
n-group/organization/facilities/
(continent)/957#map-anchor
Bridgestone http://www.bridgestone.com/corporat
e/locations/
Sumitomo http://www.srigroup.co.jp/english/corp
orate/group/index.html

99

4.9.201

Rubber Shipments

100

http://www.bloomberg.com/news/artic
les/2016-03-07/rubber-enters-bullmarket-as-top-exporters-reduceshipments

4.9.201

Rubber Pricing
http://www.rubberstudy.com/documen
ts/WebSiteData_Feb2016.pdf

101

4.9.201

Natural Rubber Production

102

4.9.201

Synthetic Rubber Production

103

4.9.201

Tire Materials Percentage

http://infohouse.p2ric.org/ref/11/1050
4/html/intro/tire.htm
104

4.9.201

Unfunded Pension 2013

http://www.benefitspro.com/2013/08/
30/goodyear-will-freeze-pension-onceits-fully-funded

105

4.9.201

Unfunded Pension 2014

http://www.pionline.com/article/20140
213/ONLINE/140219925/goodyearfreezes-us-hourly-pension-plansvulcanizes-db-plans-with-115-billion
106

4.9.201

Unfunded Pension 2015


From 10K

107

4.9.201

Share Repurchases

108

4.9.201

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