Has Goodyear Tire Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Goodyear Tire (NYSE: GT  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Goodyear Tire.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

3.4%

Fail

 

1-Year Revenue Growth > 12%

6.5%

Fail

Margins

Gross Margin > 35%

17.5%

Fail

 

Net Margin > 15%

1.3%

Fail

Balance Sheet

Debt to Equity < 50%

312.9%

Fail

 

Current Ratio > 1.3

1.78

Pass

Opportunities

Return on Equity > 15%

16.5%

Pass

Valuation

Normalized P/E < 20

8.94

Pass

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Goodyear Tire last year, the company has remained stuck on 3 points for three years running. But the shares haven't given investors much traction, with a 10% skid over the past year.

As you'd expect from a tire company, Goodyear's fortunes are closely tied to the automotive industry. With Ford (NYSE: F  ) , General Motors (NYSE: GM  ) , and other automakers dealing with extreme weakness in Europe but relative strength in North America, Goodyear has seen the same pattern, with record operating profit close to home in the second quarter but an 85% drop in operating income in Europe leading to an overall drop in sales.

Goodyear also faces stiff competition. Cooper Tire (NYSE: CTB  ) has had exceptional performance over the past year, having nearly doubled in value. In contast to Goodyear, Cooper's sales rose sharply in the second quarter.

One thing Goodyear has going for it is CEO Richard Kramer. As Fool contributor Sean Williams described last month, Kramer is doing everything from hiring veterans to reducing its carbon footprint -- a tall order for a tire company, but a challenge that Goodyear isn't backing away from.

Looking forward, much of Goodyear's fortune will rely on auto sales from Ford, GM, and Toyota (NYSE: TM  ) . Moreover, as costs come down and once international demand starts rising, Goodyear may finally be in a position to start rolling toward perfection in the years to come.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Goodyear Tire has ridden the coattails of rebounds in Ford and other automakers. But as good a job as Ford has done making good vehicles and remaining consistently profitable, Ford's stock seems stuck in neutral. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.

Click here to add Goodyear Tire to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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