Goodyear: Profits on a Roll

09/14/2015 8:00 am EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

Driven partly by low interest rates and cheap gasoline, US auto sales are on track this year to post their highest level in 15 years, notes Chuck Carlson, editor of DRIP Investor.

The strength in the US auto market is good news for Goodyear Tire (GT), one of the world’s largest tire manufacturers. Its brands include Goodyear, Dunlop, and Kelly.

The firm also operates commercial truck service and tire retreading centers and approximately 1,200 auto service locations.

Goodyear is benefiting from a number of tailwinds. Its commodity inputs, especially rubber, are favorably priced. Lower input costs have helped the firm’s profit margins expand sharply.

When buying companies in cyclical industries, it is important to recognize the cycle. There is some concern that the US auto market is near peak sales.

Admittedly, companies with exposure to cyclical industries have never been high on my recommended list.

However, Goodyear is an exception. The company seems well positioned to continue to drive profit growth.

While the yield of 0.8% is on the low side, I would expect dividend growth to be in the high single digits to low double digits over the next three years.

The firm has been putting up solid profit numbers, beating analysts’ consensus earnings estimate in each of the last four quarters.

These shares offer good value and I expect Goodyear stock to outperform the market over the next 12 months.

Underscoring its strong operating momentum and value, Goodyear’s Quadrix scores are impressive, with an Overall score of 98, a Value score of 91, and a Quality score of 93 (all scores out of a possible 100).

Please note Goodyear offers a direct-purchase plan whereby any investor may buy the first share and every share of stock directly from the company. Minimum initial investment is $250.

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