A Good Year for This Stock?

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Goodyear Tire & Rubber (NASDAQ: GT) is poised to have a great year. Goodyear saw its stock jump some 16% over the last month, and I believe there is still room for the stock to move higher.  

Higher demand for tires should be driven by an improving U.S. and global economy, which will promote an increase in miles driven and only further add to the pent-up demand for replacement parts.

Another positive is that Goodyear generates sales globally, but its key market is North America, making up 50% of revenue. One of the key drivers will be higher demand in emerging markets of Latin America, Eastern Europe and Asia.

About 70% of Goodyear's tire units are targeted at the replacement market and 30% for original-equipment manufacturers (OEMs). The nice thing about this is that margins on replacement tires are typically higher than for original equipment tires.  

Goodyear has also managed to extend its debt maturities, with no funded debt maturities until 2014, and no long-term debt due until 2016. Billionaire David Tepper is one of Goodyear's largest hedge fund shareholders (check out Tepper's top picks).

Competitive landscape

Two of Goodyear's major competitors include Bridgestone and Michelin. These three companies account for about 55% of the global market. Meanwhile, its other significant competitor includes Cooper Tire & Rubber (NYSE: CTB)Cooper saw revenue decline 2% in 2012, thanks to lower volume, but the tire company managed to post EPS of $0.87 compared to $0.34 for the same quarter last year and well above consensus forecasts of $0.69. Part of Cooper's big initiative is higher production related to its 51% ownership of Cooper Chengshan in China.

Cooper has a market share of only 15% in light-vehicle replacement tires in the U.S. The likes of Goodyear and Bridgestone are substantially larger and serve not only the replacement tire market, but also the original-equipment manufacturers. Cooper does appear to be rather cheap. The stock trades at just over 6 times earnings, compared to its five year P/E range of 6 times to 26 times. 
Helping promote higher demand for tires will be higher production by car manufacturers, including General Motors (NYSE: GM) and Ford (NYSE: F). GM is expected to see robust demand over the interim. GM posted first-quarter EPS of $0.67 compared to the $0.93 for the same quarter last year, with the fall due to lower-than-expected North American production. However, GM has been shrinking its North American production footprint and cost structure to help boost profitability. Also, the company plans to focus on fewer brands and new production.

GM had more hedge fund interest than Ford, with 110 hedge funds long the stock. Billionaire Warren Buffett's Berkshire Hathaway has the most valuable position in the stock, worth $695 million (check out Buffett's cheap stock picks).

Ford for full year 2013 expects industry volume of 16 million units, compared with 14.8 million units in 2012. As well, the company expects its 2013 market share in the U.S. to be higher than 2012.

This should help boost Ford's total revenue to increase 10% in 2013, thanks to U.S. and China growth. Ford is and should continue benefiting from rapid product introductions. As well, both Ford and GM trade at a discount to their Japanese counterparts. Ford trades at 10 times earnings, GM at 11 times, while Honda is at 19.6 times and Toyota 25 times. 

Going into the second quarter, there were a total of 47 hedge funds long the stock, after a 23% decrease from one quarter earlier. Billionaire David Tepper of Appaloosa Management has the largest position in Ford, worth close to $154 million (see Appaloosa's top picks).

Bottom line

With the rising global vehicle production and expanding global demand for tires, Goodyear could easily be poised for a great year. Compared to Cooper, Goodyear trades a bit more expensive at approximately 17.7 times earnings, with Cooper at 6.3 times. However, when we dig a bit deeper we see that Goodyear is indeed the better value.
Analysts expect Goodyear to grow EPS at an annualized 41% over the next five years, putting its PEG ratio at a mere 0.2; conversely Cooper's PEG ratio is 0.9. I see Goodyear as a long-term buy, with solid international growth opportunities. 

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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