Friday, December 04, 2009

Goodyear Tire & Rubber (NYSE:GT): Likelihood of an upside surprise for Q4 - J.P. Morgan

J.P. Morgan is out very positive on Goodyear Tire & Rubber (NYSE:GT) reiterating their Overweight rating and $22 price target ahead of a potentially very good Q4 #'s.

While it is early to make a definitive preview on tire company quarterly earnings, the firm is increasingly seeing the likelihood of an upside surprise at Goodyear for Q4 and advise adding to positions now, while the interest level remains muted. Preliminary US November tire shipment data are not out yet, but various industry sources indicate that the y/y increase in consumer replacement could be midteens. This, coupled with recent pricing developments, reinforces the view that tire industry conditions have turned a corner.

Q4 Volumes Shaping Up Well – If Nov is +15% y/y, that would imply US consumer replacement shipments in Nov are -3.5% m/m, much better than the -9.4% average seasonal decline witnessed between Oct and Nov over the past 10 years, suggesting demand may be genuinely improving off the bottom (not just because of easy year-ago comps). Further, if one estimates December consumer replacement volumes are +13% y/y (implying -5% q/q, reflecting some seasonality but also perhaps some prebuy ahead of GT’s Dec price hike), Q4 US consumer replacement tire shipment could be estimated at 58.4MM units (only -3.5% sequentially from Q3’s 60.5MM). Estimating sequential Q4 volume change in other US end-markets is less difficult, in J.P. Morgan's view: NA consumer OE should be +15% (based on relatively high quality CSM Q4 production schedules), and let’s assume commercial OE and replacement are both sequentially flat (some uptick seems to be happening in CV OE build, but they remain conservative on this segment given advertised excess inventory issues).

Bridgestone Price Hike Comes on Heels of GT’s Hike: Goodyear’s up-to-6% recent price hike (effective Dec 1) was given more sticking power by Bridgestone’s up-to-5% price hike announced two days ago (effective in Jan) (Michelin may not be that far behind such an announcement). The benefits of the price hike may help Q4 NAFTA profits by $15MM, though it is not clear whether or not this was baked into Q4 guidance. Either way, it sets CTB and GT and most global tire makers up well for Q1.

Tire Stock Views: J.P. Morgan remains Overweight in both Goodyear and Cooper. But GT seems more interesting at this juncture, though they continue to be bullish on Cooper as well. GT shares have only modestly recovered from the value lost post Q4 guidance, but firm's view on normalized earnings has not materially changed. Further, macro conditions are improving somewhat faster than expected (volumes, pricing, FX), suggesting beating reduced Q4 expectations may not be that hard.

GT now trades at a nonmeaningful P/E multiple on JPM 2009E EPS and approximately 13.7x revised JPM 2010E EPS. Firm rates GT Overweight as they believe industry volumes have troughed. J.P. Morgan's Dec 10 price target of $22 is based upon 8x their unchanged estimate of normalized EPS of $2.75 (midrange of previously stated $2.50 to $3.00).

Notablecalls: I must say that I like this call from JPM's Tires, Automobile Manufacture team, lead by Himanshu Patel. What I like most about this call is that they are not alone. Unnoticed by many, Keybanc's excellent Auto team had this to say two days ago:

// Within the last several days, several tire manufacturers have announced price increases in North America (to take effect January 1) to cover the cost of rising raw materials. This is positive for the industry and consistent with the note we wrote in early November following our trip to the SEMA show. We expect several other manufacturers, including Cooper and Michelin, to join the others and announce their own price increases within the next several weeks.

The following lists price increases already announced by manufacturers:

Bridgestone – 5% (just announced yesterday)
Continental – 5% (just announced yesterday)
Yokohama – 6% (just announced yesterday)
Nexen – 8% (announced last Friday)
Goodyear – 6% (effective December 1)
Falken – 7% (effective December 1)

Tire demand is improving and manufacturers with whom we have spoken are struggling to keep up with demand. With September inventory levels remaining very low (down 25% from September 2008); it could be 6-9 months before inventory levels return to normal rates. While official data is not yet available as the month just ended, we estimate that consumer replacement tire shipments in November could have been up by as much as 15% year-over-year.

Given these positive trends, we remain bullish on the tire industry. Our ratings on Goodyear Tire (GT-NYSE), Cooper Tire (CTB-NYSE) and Cabot (CBT-NYSE) remain BUY. //

Goodyear (GT) is down 5 pts from the $18+ level it was trading before the Q3 #'s and we have two very good firms calling for surprisingly good numbers. I can understand people not noticing Keybanc's commentary but I think JPM will get attention.

While it's kind of tough to make a call here, I suspect GT may see some buy interest in the n-t, possibly even today.

I want to see a slight gap-up in the shares this morning which may ignite a larger upside move. Could trade above $14.00 in a hurry and continue higher throughout the day. If they get this one going, it can trade up 6-8%.

2 comments:

Smaug the Golden said...

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