Professional Documents
Culture Documents
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%
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
C O M PA N Y
THESIS
VA LU AT I O N
RISKS
CONCLUSION
4.9.201
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
THESIS
VA LU AT I O N
RISKS
CONCLUSION
4.9.201
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
60%
71%
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
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
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
~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
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
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
500
450
JPY per kg
400
350
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
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
Decrease in production
+ inventories leads to
increasing
natural
rubber
prices
Margin
Compres
sion
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
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
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
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
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
millions
3000
3500
2500
Any
2000
$1.5B
decrease
disruption
in cash
21
$413
million
in share
buybacks
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
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
$(2.00)
22
C O M PA N Y
2016
THESIS
VA LU AT I O N
RISKS
CONCLUSION
4.9.201
Comparables Analysis
Trailing P/E
Forward P/E
P/BV
NTM
EV/EBITDA
NTM EPS
48,909.6
14.33x
12.65x
8.1x
6.5x
17.51
28,230.9
27,402.9
11.15x
9.65x
1.5x
4.1x
3.74
100.55
18,242.2
19,705.8
14.07x
10.94x
2.0x
4.4x
9.19
1.98
6,426.6
7,406.3
16.24x
14.12x
2.5x
7.6x
0.14
15.06
3,951.7
6,062.9
7.94x
7.91x
1.2x
5.2x
1.91
15.71
2,519.7
3,894.8
7.80x
8.55x
0.9x
4.9x
1.84
36.23
2,011.7
1,854.4
9.82x
9.37x
2.4x
3.8x
3.87
19.11
1,752.2
NM
9.92x
11.14x
0.9x
NM
1.72
7.27
1,148.6
3,303.5
NM
15.78x
1.2x
8.2x
0.46
32.49
8,682.5
13,184.5
10.85x
8.42x
2.7x
5.0x
3.86
Company Name
Continental Aktiengesellschaft (DB:CON)
Bridgestone Corp. (TSE:5108)
Compagnie Generale DES Etablissements Michelin SCA
(ENXTPA:ML)
Cheng Shin Rubber Industries Co. Ltd. (TSEC:2105)
Share
Price
Market Cap
221.52
44,306.5
36.04
EV
23
MIN
2.0
1,148.6
1,854.4
7.8x
7.9x
0.9x
3.8x
0.14
MEAN
48.6
11,727.3
14,636.1
11.3x
10.9x
2.3x
5.5x
4.42
MED
25.8
5,189.2
7,406.3
10.9x
10.3x
1.8x
5.0x
2.83
MAX
221.5
44,306.5
48,909.6
16.2x
15.8x
8.1x
8.2x
17.51
C O M PA N Y
THESIS
VA LU AT I O N
RISKS
CONCLUSION
4.9.201
Intrinsic Valuation
Discounted Cash Flow Analysis
($ 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
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
$4,752.31
Shares Outstanding
267.24
$17.78
$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
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
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
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
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
30
C O M PA N Y
THESIS
VA LU AT I O N
RISKS
CONCLUSION
4.9.201
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
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%
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
37
C O M PA N Y
THESIS
VA LU AT I O N
RISKS
CONCLUSION
4.9.201
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
THESIS
VA LU AT I O N
RISKS
CONCLUSION
4.9.201
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
60%
71%
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
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
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
~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
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
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
500
450
JPY per kg
400
350
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
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
Decrease in production
+ inventories leads to
increasing
natural
rubber
prices
Margin
Compres
sion
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
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
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
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
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
millions
3000
3500
2500
Any
2000
$1.5B
decrease
disruption
in cash
55
$413
million
in share
buybacks
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
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
$(2.00)
56
C O M PA N Y
2016
THESIS
VA LU AT I O N
RISKS
CONCLUSION
4.9.201
Comparables Analysis
Trailing P/E
Forward P/E
P/BV
NTM
EV/EBITDA
NTM EPS
48,909.6
14.33x
12.65x
8.1x
6.5x
17.51
28,230.9
27,402.9
11.15x
9.65x
1.5x
4.1x
3.74
100.55
18,242.2
19,705.8
14.07x
10.94x
2.0x
4.4x
9.19
1.98
6,426.6
7,406.3
16.24x
14.12x
2.5x
7.6x
0.14
15.06
3,951.7
6,062.9
7.94x
7.91x
1.2x
5.2x
1.91
15.71
2,519.7
3,894.8
7.80x
8.55x
0.9x
4.9x
1.84
36.23
2,011.7
1,854.4
9.82x
9.37x
2.4x
3.8x
3.87
19.11
1,752.2
NM
9.92x
11.14x
0.9x
NM
1.72
7.27
1,148.6
3,303.5
NM
15.78x
1.2x
8.2x
0.46
32.49
8,682.5
13,184.5
10.85x
8.42x
2.7x
5.0x
3.86
Company Name
Continental Aktiengesellschaft (DB:CON)
Bridgestone Corp. (TSE:5108)
Compagnie Generale DES Etablissements Michelin SCA
(ENXTPA:ML)
Cheng Shin Rubber Industries Co. Ltd. (TSEC:2105)
Share
Price
Market Cap
221.52
44,306.5
36.04
EV
57
MIN
2.0
1,148.6
1,854.4
7.8x
7.9x
0.9x
3.8x
0.14
MEAN
48.6
11,727.3
14,636.1
11.3x
10.9x
2.3x
5.5x
4.42
MED
25.8
5,189.2
7,406.3
10.9x
10.3x
1.8x
5.0x
2.83
MAX
221.5
44,306.5
48,909.6
16.2x
15.8x
8.1x
8.2x
17.51
C O M PA N Y
THESIS
VA LU AT I O N
RISKS
CONCLUSION
4.9.201
Intrinsic Valuation
Discounted Cash Flow Analysis
($ 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
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
$4,752.31
Shares Outstanding
267.24
$17.78
$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
63
C O M PA N Y
THESIS
VA LU AT I O N
RISKS
CONCLUSION
4.9.201
64
C O M PA N Y
THESIS
VA LU AT I O N
RISKS
CONCLUSION
4.9.201
65
C O M PA N Y
THESIS
VA LU AT I O N
RISKS
CONCLUSION
4.9.201
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
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
69
C O M PA N Y
THESIS
VA LU AT I O N
RISKS
CONCLUSION
4.9.201
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
72
4.9.201
73
4.9.201
74
4.9.201
75
4.9.201
76
4.9.201
77
4.9.201
Depreciation Schedule
78
4.9.201
Amortization Schedule
79
4.9.201
80
4.9.201
81
4.9.201
Beta Calculation
82
4.9.201
Income Statement
83
4.9.201
Balance Sheet
84
4.9.201
85
4.9.201
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
92
4.9.201
Comparative Pricing
93
4.9.201
4.9.201
4.9.201
4.9.201
Imports by Country
4.9.201
4.9.201
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
102
4.9.201
103
4.9.201
http://infohouse.p2ric.org/ref/11/1050
4/html/intro/tire.htm
104
4.9.201
http://www.benefitspro.com/2013/08/
30/goodyear-will-freeze-pension-onceits-fully-funded
105
4.9.201
http://www.pionline.com/article/20140
213/ONLINE/140219925/goodyearfreezes-us-hourly-pension-plansvulcanizes-db-plans-with-115-billion
106
4.9.201
107
4.9.201
Share Repurchases
108
4.9.201