Goodyear said its production costs are rising.
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A spectacular drop in Goodyear stock on Friday was an overreaction, according to J.P. Morgan analyst Alan Brinkman. He raised his rating on the stock to Overweight, citing impressive fourth-quarter results and other positive factors.
Shares of the tire manufacturer tumbled 27.4% on Friday—its worst single-day performance in nearly 35 years—after the company said it is expecting to only break even in terms of free cash flow in 2022 due to rising costs. Goodyear (ticker: GT ) posted $372 million in free cash flow in 2021.
The shares slid even though Goodyear posted $5.1 billion in sales, its highest fourth-quarter revenue in 10 years.
Brinkman, who upgraded the stock from Neutral, thinks the market’s reaction went too far. Before the announcement, the consensus call among analysts tracked by Bloomberg was for 2002 free cash flow of $461 million, while J.P. Morgan had expected $250 million.
The company’s cash-flow guidance took into account spending in areas such as wages, benefits, transportation, and energy costs, which CEO Richard Kramer sees persisting over the next several quarters. “On this front, we estimate Goodyear needs to increase price by roughly over 7% in order to offset an estimated over 30% year over year rise in feedstock prices from 3Q21 through 2Q22 as per our J.P. Morgan Tire Raw Materials Index,” Brinkman said.
The analyst thinks Goodyear’s tire pricing has been quite strong so far this cycle and expects higher costs to be recovered over time. The near term could be choppy but there is plenty of value for patient investors, he noted.
“Over the long run, Goodyear should also benefit from structurally higher demand for higher technology tires, such as High Value Added (HVA) tires for electric vehicles (i.e., lower noise and low rolling resistance), given stricter emission standards in China and Europe driving global demand for electric vehicles” and “from merger-related synergies following the acquisition of Cooper Tire & Rubber,” he noted. Goodyear completed the acquisition mid-last year.
Brinkman reduced his financial forecasts for Goodyear and cut his target for the stock price to $23 from $25 earlier. His call on earnings per share for 2023 went to $2.70 a share from $3 a share. He now expects adjusted earnings before interest, taxes, depreciation, and amortization of $2.57 billion in 2023 versus $2.66 billion earlier.
Shares of the company were up 5.6% to $16.67 on Monday.
