The Goodyear Tire & Rubber Company (NASDAQ:GT)

WHITE BROOK CAPITAL IDEA:
Goodyear is one of the 3 largest tire companies in the world and operates a distributed manufacturing capability globally. 50% of their revenue comes from the America’s region, with the US and Brazil as the notable markets within that group, EMEA is 30% of the business and the rest is Asia Pacific which contains the notable markets of China and India. About 80% of their revenue are replacement tires with the balance sold to new car manufacturers (OEM).
Goodyear uses a size nomenclature to denote premium and non-premium tires, where less than 17 inches, is a commodity tire and above, is premium. Most of their business is non-premium, commodity tires, where they earn on average $9 per tire in the replacement market, and $7 at the OEM.
However, a rapidly increasing percentage of tires are now above 17 inches due in large part to the popularity of SUV and light truck sales and now make up almost 50% of the replacement market. Goodyear earns $19 on average in the OEM channel and $28 when replacing a 17-inch tire.
Goodyear’s sizable replacement business partially insulates the Company from the impact of new car sales. Recessions, however, still impact the business as tire replacement is a function of consumer confidence and miles travelled. In the US both are and have been strong, but that hasn’t been true in the Chinese or Indian markets or much of EMEA through much of 2018 and 2019. Despite that, Goodyear has been able to grow their replacement business in Asia, while EMEA is subject to a more wholesale restructuring process.
At 4.6x 2020 EBITDA, and a mid double digit 2021 FCF yield, I believe Goodyear is very inexpensive. They’ve made necessary short-term sacrifices to ensure the long term which they should begin to benefit from in 2020. Their business is macroeconomically resilient, and with a $150mm+ EBITDA tailwind (12%+) based on the cessation of the raw material headwind alone, I am confident in their ability to generate substantial cash flow over the medium term. I believe owning the stock at these prices represents a great investment opportunity.