Price Matters, and The Goodyear Tire & Rubber Company (GT) is at Resistance

October 06, 2013, 09:30 am ET, BY Neal- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

The Goodyear Tire & Rubber Company (NASDAQ:GT) is trading at 5 year highs after receiving multiple upgrades from analysts. The company recently said it plans to reinstate its quarterly dividend, which it has not done for over 10 years, and will start a $100 million share repurchase program.  Shares of Goodyear are up 60% YTD, everything appears on track, but is the stock a buy at these levels?

Goodyear is the No. 1 tire maker in North America and Latin America, and No. 2 in Europe. Globally, it sits in third spot by sales, behind Japan’s Bridgestone and Michelin of France. , selling its products under the Goodyear, Kelly, Dunlop, Fulda, Debica,  and Sava brands.  Outside of just tires, the company also makes rubber-related chemicals for industrial applications and operates commercial truck service and tire retreading centers, as well as auto service outlets.

There have been a number of ways for investors to profit from the rising auto sales. Investors who bought shares of General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) have enjoyed solid returns, however investors who bought Goodyear this year have seen more than double the returns of the big automaker’s stocks. Goodyear shares have risen sharply so far in 2013, partially because of the latest earnings report and on news of rival Cooper Tire & Rubber Co (NYSE:CTB), who is being taken over by India’s Apollo Tyres.  Based on the Stock Traders Daily real-time trading report, shares of GT are trading near long-term resistance and a near a 52-week high, offering contrarian reads for investors even though recent news is good..   

Goodyear’s results are very similar to those of the global auto industry. In 2012, it saw higher sales to automakers, but replacement tire sales, which make up a large part of the overall tire market, remained depressed as the weak economy kept many consumers from buying new tires for their older cars.  Like the overall auto industry, Goodyear has also seen weakness in Europe.

Goodyear last released its earnings data on Tuesday, July 30.  The company reported $0.67 earnings per share (EPS) for the quarter, beating the consensus estimate of $0.48 by $0.19. The company had revenue of $4.89 billion for the quarter, compared to the consensus estimate of $4.88 billion. During the same quarter in the previous year, it posted $0.56 earnings per share. The company’s revenue for the quarter was down 4.9% on a YOY basis. Analysts expect that Goodyear will post $2.35 EPS for the current fiscal year.  Lower raw material expenses and cost cuts were major factors behind Goodyear’s improved profits, as the company reported $177 million of reduced raw material costs during the quarter. 

The company said its directors have declared a quarterly dividend of five cents a share, payable Dec. 1 to shareholders of record Nov. 1.  Future dividends will be subject to board approval. Goodyear said the share repurchase program authorized by director’s calls for the acquisition of up to $100 million of the company's common stock. Goodyear last paid a common stock dividend in December 2002.

Investors should be aware that the company’s long-term debt is high, which at $6.3-billion, is even higher than the company’s $5.2-billion market cap.  Goodyear does have $2.6 billion of cash on its balance sheet, up from $2.3 billion a year ago, however, it also remains heavily reliant on replacement tires and needs a recovery in that market.

Goodyear shares are up 87% from April 1 and trading at 5-year highs.  Although the recent earnings report was very positive, the stock has made a big run and might have already factored in much of the good news. More important than just the recent earnings, and recent upgrades, is the current price of Goodyear’s shares.  Investors do not make money from news, they make money when stock prices move, and that is our focus as a result.  The stock is near a test of long-term resistance, as defined in the real time trading report published by Stock Traders Daily.  As a rule, if the stock remains below resistance, we expect lower levels and a test of support. That would make GT a sell/short at resistance and it would cause longer term resistance to become a measure of risk control for those positions.   

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