Goldman Sachs: Goodyear Tire Has 20% Downside Potential

Tire companies like Goodyear Tire & Rubber Co GT continue to face multiple headwinds and implies investors should hold a bearish stance on the stock, according to Goldman Sachs.

The Analyst

David Tamberrino downgraded Goodyear Tire from Neutral to Sell with a price target lowered from $25 to $18.

The Thesis

Investors should have a bearish stance on Goodyear Tire's stock for four key reasons, Tamberrino said a note.

The company is likely to face rising raw material costs from oil, steel, butadiene and carbon black dynamics. As such, management may be forced to lower its 2018 segment operating income guidance from its prior range of $1.8 billion to $1.9 billion to $1.55 billion.

Goodyear Tire will likely be in a position where it won't be able to pass on higher costs of tires to customers, Tamberrino said. The competitive environment continues to intensify, especially with the entrance of lower cost China-based tire manufacturers setting up production facilities in the U.S.

Goodyear Tire bulls highlight the company's potential to achieve an annual $800 million to $1 billion free cash flow, but the analyst models a more realistic figure to be $400 million to $550 million for both 2019 and 2020.

Goodyear Tire's valuation could compress lower given the multiple headwinds ahead, the analyst said. Specifically, the stock warrants a 4 multiple on EV/EBITDA, which is a discount to its historical average multiple of 4.25 times.

Price Action

Shares of Goodyear Tire were trading lower by more than 2.5 percent Tuesday at $21.89.

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