Oklahoma Modernization And Divestitures Will Deliver $750 Million Savings

Key Takeaways

• Strategic divestitures and leadership changes aim to streamline operations and improve efficiency, effectively reducing costs and increasing net margins.
  
• Expanding manufacturing and high-margin product lines are set to support future revenue growth by capturing more premium market share.
  
• Rising competition from low-cost imports, tariff uncertainties, raw material fluctuations, and execution risks threaten Goodyear’s market share, profitability, and earnings growth.

Catalysts

Develops, manufactures, distributes, and sells tires and related products and services worldwide.

• The Goodyear Forward program has been successful in driving margin expansion and is expected to deliver significant cost savings of $750 million in 2025, impacting net margins and earnings positively.
  
• The modernization project in Oklahoma will increase manufacturing capabilities, adding about 10 million units of new capacity for premium tires by 2025 and 2026, supporting future revenue growth.
  
• Strategic divestitures of the OTR business and the Dunlop brand are designed to streamline operations and reduce leverage, which will lower interest expenses and potentially increase net margins.
  
• New product lines and an expanded high-margin SKU portfolio are expected to enhance revenue by capturing more premium market share, particularly in the U.S.
  
• Leadership changes and a global standardization of processes aim to improve operational efficiency, reducing costs that could increase net margins over time.

Goodyear Tire & Rubber Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Goodyear Tire & Rubber's revenue will decrease by 0.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.4% today to 2.7% in 3 years time.
• Analysts expect earnings to reach $512.5 million (and earnings per share of $1.78) by about April 2028, up from $70.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.9x on those 2028 earnings, down from 44.6x today. This future PE is lower than the current PE for the US Auto Components industry at 14.6x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Goodyear Tire & Rubber Future Earnings Per Share Growth

Risks

• The increase in low-cost imported tires, primarily from Southeast Asia, poses significant competition and could lead to decreased market share and lower revenues for Goodyear in the consumer replacement market.
  
• The uncertainty around tariffs and potential impacts on Canadian and Mexican supply could affect operating costs and margins, leading to volatility in earnings.
  
• Fluctuations in raw material costs are a concern; any further increase could limit Goodyear’s earnings growth, affecting net margins and profitability.
  
• The strategic moves to optimize manufacturing and sales, including the modernization of plants, carry execution risks that could impact the forecasted $750 million in cost savings, potentially affecting net income.
  
• The completed divestiture of the OTR business and the sale of the Dunlop brand lead to a decrease in revenue and segment operating income, which could impact overall company profitability if not offset by new product lines and market penetration strategies.

Valuation

• The analysts have a consensus price target of $11.54 for Goodyear Tire & Rubber based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $14.0, and the most bearish reporting a price target of just $10.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $18.8 billion, earnings will come to $512.5 million, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $10.94, the analyst price target of $11.54 is 5.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.