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Important disclosures appear on the last page of this report.

Consumer Discretionary Recommendation: BUY

Analysts

Bryce Engelbart

[email protected]

Jeremy Dobes

[email protected]

James Savage

[email protected]

Company Overview

Goodyear Tire and Rubber Company is a world leader in the

manufacturing of tire and rubber related products.

Operations are conducted through two main business

channels: Original Equipment and Replacement tires.

Accompanied with an iconic brand name, Goodyear’s scope

of operations reaches to most regions of the world. A

majority of business results from North American

operations while the remainder stems from Europe, Latin

America, and Asia. The firm has manufacturing plants in

22 different countries and employs 69,000(xi). Goodyear

reported a Net Income of 2,452 million dollars for year-end

2014.

Stock Performance Highlights 52 week High $28.98

52 week Low $18.87

Beta Value 1.35

Average Daily Volume 3.67 m

Share Highlights Market Capitalization $7.23 b

Shares Outstanding 690 m

EPS 2014 9.02

P/E Ratio 9.57

Dividend Yield .9%

Dividend Payout Ratio .24%

Company Performance Highlights ROA 13.54%

ROE 73.88%

Sales $18.1b

Operating Income $1.8b

Financial Ratios Current Ratio 1.63

Goodyear Tire and Rubber Company

(NYSE: GT)

Current Price $27.06

Target Price $31.09

GT Exhibits Potential Strength

Drivers to Thesis

Since hitting over $100/barrel in 2014 Q3, oil prices have declined to $56.17/barrel. This low-price

environment has led to individuals driving more which

puts Goodyear in a position to expect increased

replacement revenues. Additionally, the cost of oil-

based inputs has decreased, which we project will

decrease COGS by 5.68% over the next year.

As a firm in the Consumer Discretionary sector, Goodyear is quite sensitive to the health of the market.

Growth in the economy bods will, as the U.S. economy

As the automotive sales continue to climb, Goodyear is positioned itself to experience an increase of revenue

from the original equipment segment, specifically in

domestic and emerging markets.

Fully funded pension plan.

Risks to Thesis

As the U.S. dollar appreciates versus foreign currencies, such as the Euro, we anticipate revenues in these

regions to decrease due to the heighted cost of

importing American goods.

Despite the current low-price environment of input costs, these commodities are still subject to fluctuations

in the long term.

One Year Stock Performance

Figure 1-1


Through the use of the discounted cash flow model,

economic profit model, and relative price-to-equity model

we believe that Goodyear is currently undervalued by

14.18%. Thus, we are issuing a BUY suggestion to the

Krause Fund. We believe that the firm is positioned for

growth domestically and increasingly important emerging

markets. As the U.S. economy continues to shift out of the

Great Recession, the American consumer is starting to show

confidence in the economy. This is found evident through

consumption expenditure and consumer confidence

measures. Despite the looming hardships in Europe, we

believe that Goodyear has made wise investments in Asia

and Latin America. Additionally, the firm is positioned to

benefit from the current low-price commodity environment.

Real GDP

Real Gross Domestic Product (GDP) illustrates inflation-

adjusted expansions or contractions in an economy during a

specific time period (ii). Typically expressed year-over-year,

in order to see how the economy is performing compared to

the prior year. Essentially, this broad metric illustrates

health of an economy. GDP is composed of four main

categories; investment, net export, government expenditure,

and consumption (ii). We are specifically concerned with

consumption as it has the ability to gauge discretionary

spending.

As noted in Figure 1-2, 2015 Q1 Real GDP registered a

growth of 2.1% greater than its 2013 counterpart (i). Despite

this economic expansion, it missed a consensus estimate of

2.6% growth. We believe that this disappointing growth

figure had been caused by a deflation scare which stagnated

investments. As Figure 1-1 depicts, consumption has been

at strong levels in the years following the last recession.

Additionally, consumption grew at 4.4% in 2015 Q1

compared to the prior year (i). We project that 2015 Q2 will

register at 2.8%, fueled by confidence in oil prices and an

improving job market.

.

Approximately 70% percent of Goodyear’s domestic

revenue has come from the pocket of American consumers (iii). North American replacement tire segment has

historically have credited for 28.6% of total tires sold (iii).

With that in mind, gauging how the American consumer

will spend allows us to properly project growth in our

replacement tire segment revenue. As the economy

continues to expand, we believe that our North American

revenue projections of 5% average-annualized from 2015

through 2019 and a steady state 2.5% grow is warranted.

Interest Rates/Strong U.S. Dollar

In response to the events of the Great Recession of 2008 the

Federal Reserve, under Ben Bernanke’s direction, put into

place a set of Quantitative Easing policies. These policies

ultimately had an affect on the money supply which, in turn,

lowered interest rates. These lower interest rates aimed to

spur spending amongst consumers. Under current

leadership from Janet Yellen these policies ended in

October 2014. However, quantitative Easing’s affects are

still being felt to this day and as shown in figure 1-3 interest

rates still linger at historical lows (iv). According to

guidance from the Federal Reserve we can expect a rise in

rates coming in the first quarter of 2016 (v).

Lower interest rates by nature provide a lower cost of

borrowing, thus increasing the purchasing power for both

firms and individuals. With the inevitable rise in interest

rates looming within the next year, we have incorporated the

consumer’s marginally increased cost to borrowing into

revenue projections. We do not believe that the initial raise

in rate will be substantial, as the Fed still views the

American economy as fragile. However, we do see rates

increasing by a substantial amount in the long term, which

in turn, will negatively impact our domestic revenues. We

believe a reasonable long term Fed Funds rate will be

approximately 2.00%.

As the domestic central bank aims to raise rates other

entities, such as the European Central Bank, China, and

Australia, plan to lower their respective rates. This raise in

domestic rates coupled with cuts to international rates will

appreciate the value of the U.S. Dollar even further. A

comparatively stronger dollar has two impacts to our model.

Executive Summary

Macroeconomic Outlook


First, the international revenue in our model will reflect the

increased costs of importing domestic goods. This

increased cost will lower exports, which we believe will

lower Goodyear’s international revenues, specifically in

Europe. Secondly, we believe that a strong U.S. dollar will

allow Goodyear to improve margins, by reducing costs

spent on raw materials from across domestic borders. We

have represented this sentiment with decreasing the rate at

which COGS increases based on historically averages

during the years of 2015 and 2016.

Inflation

Inflation is gauged by the Consumer Price Index. An

increase in this index reflects an increase in prices. The

Federal Reserve maintains a mandate of keeping inflation at

2%. As noted in figure 1-4, the price of goods in the

economy actually decreased by .1% in March compared to

this time last year (iv). We are not worried of this

deflationary hiccup as the Fed has shown the ability to

achieve this target and we feel confident in their ability to

do so. This confidence in the Fed allows us to keep

inflation at a constant 2% in our model’s forecast.

An increase in inflation will encourage firms and

individuals to consumer today rather than in the future when

prices are perceived to be higher. Our model is impacted in

several ways by inflation. Revenue from both the

replacement and original equipment segment is partially

driven by assumption that prices will rise in the future, thus

encouraging both set of consumers to spend. If that

assumption were to change, due to deflation, we believe our

consumers would stagnate their consumption in order to

cash in on cheaper prices in the future. Additionally,

inflation impacts Goodyear’s decision to purchase inputs or

increase capital expenditures. If we were to lose faith in the

Fed maintaining inflation of 2%, we believe that Goodyear

may hold off capital expenditures.

Despite out assumption that domestic inflation will remain

around a healthy 2%, we are unsure of our European

counterparts. Worries of deflationary trends in Europe will

have an impact on international consumption. Firms

believing that prices are actually on the decline will defer

expenditures today in order to spend at a less costly rate in

the future. It is because of this fear of deflation that we

have projected less revenues from both revenue streams

from the European region in the model during the short

term. We do not see deflation a long term issue in Europe,

thus this inflation effect is absent in our projections beyond

2017.

Employment

Gauged by two metrics: unemployment rate and the

monthly nonfarm payroll survey. During the lowest point of

the prior recession compared to last month end the

unemployment rate has improved from 10 % to nearly half

that rate at 5.5% (v). As shown in figure 1-5, Durable Goods

Manufacturing (Goodyear’s employment base)

unemployment figure is actually less than the aggregate

household survey. As of March 2015, unemployment in

this sector was 4.8% (v).

However, there is a hidden side to the employment numbers

that we would like to highlight: the participation rate.

Participation rate shows those of the total working age

population are actually in the labor force. The participation

rate grants further context to unemployment figures, as we

believe that unemployment numbers look positive because

individuals are simply dropping out of the labor force. We

believe that Janet Yellen and the rest of the Fed look to this

number and may be a variable as to why interest rates still

remain at historical lows.

Employment rates have a strong impact on our model.

Mainly, employment will impact replacement tire segment

revenue; if there are less individuals with jobs, then that

equates to less income to spend on discretionary goods, such

as tires. Additionally, if less individuals do not have jobs to

travel to everyday the turnover on existing tires will take

longer to occur. This would delay revenues in our model.

Disposable Income

Personal Income less taxable income and adjusted for

inflation will equate to Real Disposable Income; portion of

the income that individuals have at their disposable to

spend. The current environment of Real Disposable Income

is quite encouraging. 2014 Q4 observed a 3.6% increase

from the prior quarter.

This metric is an important indicator to our model’s

forecasts, as it provides the slice of income that

discretionary firms, such as Goodyear, hope to translate into

revenue. Additionally, this metric also illustrates the


amount of revenue that individuals can spend on new

automobiles or air fare, which in turn feeds more demand

for the original equipment segment.

Industry Overview

The Tire Manufacturing industry is composed of firms that

manufacture tires and tire-related products for motor

vehicles and aircrafts. Finished products find their way to

consumers through two primary channels; original

equipment and replacement. Original equipment channel

funnels to various automobile and aircraft manufacturing

firms that use these finished products as input to create their

own finished product. Replacements channel funnels to

individual consumers through independent retailers and

whole owned retail stores. Estimates show that the industry

grew by .6% in 2014 (vi). Additionally, industry revenue is

estimated to increase by 6.2% by the year 2019 (vi).

Key Metrics

Price of Oil

Oil prices play a role on both sides of the equation;

consumer driving patterns and firm raw material input costs.

On the consumer end, gasoline prices have dropped

substantially over the last two quarters. This low cost of

travel spurs and rise in vehicle miles driven, thus increasing

the demand for replacement tires as older units need to be

replaced. This impacts our model specifically in the

replacement segment revenue. The second role is on the

firm side of the equation. Oil is a key input to

manufacturing tires and tire-related products. With raw

materials inputs contributing to 63.4% of all costs afforded

by tire manufacturers, it would be of no surprise that lower

input costs from oil would benefit a firm’s income

statement. With that in mind, oil prices have a direct effect on our model’s COGS.

The current oil price environment has positioned both

consumers and tire manufacturers to benefit. The last

closing price of WTI oil per barrel was $56.17. We expect

in the short-term for oil prices to remain at current levels.

However, as figure 2-1 projects through the use of WTI oil

future prices, due to tensions in the Middle East and the

looming demise of domestic oil fracking, we believe that oil

prices will raise in the long term to a more moderate price of

approximately $70 a barrel by 2020. We note that looking

to the futures market for price guidance is purely

speculative. However, we believe that this price reflects the

expectations of commodity experts.

Price of Synthetic Rubber We believe it is also important to highlight another key

input for tires and tire-related products: Rubber. The price

of this commodity solely impacts tire manufactures as an

input cost. As stated before, inputs consist of 63.4% of all

costs attributed by tire manufacturers. Historically,

synthetic rubber is a volatile commodity due to trade

fluctuations and weather (specifically in South East Asia).

The current environment for rubber prices has been one that

tire manufactures welcome wholeheartedly. As figure 2-2

depicts, the current synthetic rubber prices register at

$78.72. This price is the result of a slow decline of -71.9%

since peaking in 2011 Q1. This price is highly dependent

on the Chinese economy as the country is the highest

importer of the raw material.

Going forward, we believe that synthetic rubber prices will

continue to stay at its current price for various reasons.

According to commodity experts, there is an expected over

supply of this input material projected for 2020 (vii). These

high inventories are due to the oversupply of the market that

has been caused by a slight stagnation in the Chinese

economy. We believe that due to these high inventories of

rubber that there is a reduced chance that synthetic rubber’s

price will rise due to scarcity. We forecasted the price of

rubber to equate to approximately $62.00 per pound in our

steady state 2020. We feel confident in this number as it

aligns with industry experts.

Total Vehicle Miles

This metric includes the total miles driven by all types of

motor vehicles. As individuals drive more miles, their

existing tires become worn out and need to be replaced. It is

because of this thinking that total vehicle miles impacts the

replacement segment revenue in our model.

Industry Analysis


It is imperative to highlight total vehicle mile’s relationship

with oil prices. As shown in figure 2-3, oil prices are

represented through gasoline prices. When gasoline (a

finished good of oil) prices increase total miles driven

decreased as well. Having a pulse on these metric will

allow us to properly gauge replacement segment revenue.

As figure 2-3 depicts, total vehicle miles driven has

increased by 4.89% in March compared to its 2014

counterpart. The current environment of low oil prices and

economic growth bods well for Total Vehicle Miles and in

turn for replacement tire revenue. We project that this

metric will continue to show healthy growth, due to lower

oil prices, more fuel efficient tires, and stable domestic

economic growth.

Automotive Manufacturing Demand of automobiles has a direct impact on the original

equipment business segment for tire manufacturers. As

demand increases for new cars, inputs for those cars will

increase accordingly. Demand for automobiles impacts the

model through original equipment segment revenue.

We believe that demand for automobiles will continue to

grow over the next years for various reasons. Many rates

for auto loans move with the short end of the yield curve.

Currently, the Fed Funds rate is at all-time low. This rate

effective variable interest rates, such as auto lows. We do

not believe these rates will rise until early 2016. We believe

that the eventual increase in rates will not be substantial by

any stretch of the imagination. Additionally, consumer

confidence remain to hover around high levels. Give data to

consumer confidence. Finally, real disposable income

continues to climb, leading consumers to make big ticket

purchases such as an automobile. It is for these reasons that

we feel confident regarding the demand of automobiles and

positive growth in the original equipment segment of our

model.

Industry Trends

Reduction of Labor Costs

Due to the uncertainty of input prices, tire manufactures

have searched for other avenues to cut costs. One of these

avenues has been to look to international markets for access

to lower-labor costs. Wages are the second largest cost to

the industry, representing 14.6% of all costs in 2014. We

can notice that Goodyear has done this by opening new

plants in Mexico and China. Another reason tire

manufactures are finding themselves expanding into these

areas is due to international competition. Domestic tire

manufactures have a difficulties competing against firms in

emerging markets that benefit from low labor costs.

Industrywide establishments are expected to increase to 619

by the year 2019, which is a 7% annualized increase from

current levels of 599.

Changing Market Demands

The great recession still has consumers feeling burnt, thus

looking to be more conscious with their budget. We believe

this will drive consumer to invest in tires that improve fuel

economy. Estimates project that these fuel efficient tires

will continue to outperform traditional tires going forward.

Since the industry has not had a substantial technological

leap in over a decade. We believe that firms in the industry

will focus heavily on these new tires and attempt to

differentiate products in order to gain market share. These

more fuel efficient tires will do not require substantial

capital investment, as these new product are able to build on

existing production lines with minimal investment

(IBISWorld).

Overview of Competition

The Tire Manufacturing is an industry that is comprised of

four main firms that account for 74% of all industry

revenue. This is illustrated in figure 3-1. There are two

essential business segments in this industry: original

equipment and replacement tires. Barriers to entry in the tire

manufacturing are high. The high barriers can be attributed

to the capital significant amount of capital investment to

begin operations, which can be attributed to the

astronomical cost of equipment, an increase in the

Markets & Competition


regulatory environment, and the volatility of revenues.

These four main firms, in order to gain market share, have

recently invested an increased amount into research and

development in hopes of differentiating their product from

competitors.

Market Competition

Figure 3-1

Compagnie Générale des Etablissements Michelin

Michelin is the largest manufacturer of tires in North America.

With the ownership of twelve manufacturing facilities in The

United States and with average daily capacity of 165,000 tires,

in 2014, Michelin had revenues of $7,643 million. The

company’s current profitability can be attributed to their ability

to control pricing and its inventory and production volume.

Bridgestone Corporation

Bridgestone Corporation’s focus on eco-friendly products has

helped the company to increase market share and revenue

growth over the last few years. The company has more than

8,000 product lines. Recently, the firm has shifted its focus after

the recession to value-added products with the objective in mind

to sustain revenue growth. The Japan-based firm will benefit as

the revenues from America increase as the dollar increases

relative to the Yen, thus increasing Japanese exports.

Cooper Tire & Rubber Company

Cooper Tire & Rubber Company, the fourth-largest

manufacturer of tires in the United States, has shifted away from

their business model of not selling their tires to automobile

manufacturers. Recently, the company entered into an agreement

with Ford Motor Company to provide original equipment

manufacturing tires for their Ford Focus SE and Titanium

models. The company is currently experiencing an increasing

pressure from international competitors. To combat this

competition, the company has invested in plants in China and

Mexico. Although they have made these investments, the

government has not illustrated that they will lift the tariff on

imported tires.

Threat of New Entrants

There is a low threat of new entrants into the tire manufacturing

industry as the barriers to entry are high. Although there are not

significant government regulations or licensing agreements,

there are existing distribution channels and significant initial

capital outlays that deter competitors from entering the market.

Companies in the tire manufacturing industry must adhere to

regulation or face the prospect of being shut down. Therefore, it

is of severe importance for companies to hire the most skilled

labor to meet these stringent regulations. This makes it hard for

new entrants into the market as skilled employees are already

employed at existing companies and hiring them to join a new

firm would prove costly.

Threat of Substitutes

The threat of substitutes is low for the tire industry. Customers

who wish to drive a car must purchase tires. Technology for

producing tires has not changed in the past twenty years. The

current trend in the industry is to produce value-added products

from equipment already in place.

Bargaining Power of Customers

Bargaining power of customers is high due to low differentiation

of products within in the industry. Due to the low concentration

of purchasers and the high volume of tire orders, customers hold

immense bargaining power. In the future this bargaining power

will decrease as manufacturers start to sell directly to the

consumer. We believe that Goodyear has a great opportunity to

sell directly to consumers through the launch of the firm’s online

replacement tire website.

Bargaining Power of Suppliers

A majority of costs absorbed by tire manufactures is attributed to

the cost of raw material inputs. These raw materials may be

subject to commodity fluctuations. Thus, the bargaining power

of suppliers does shift with these price swings.

Intensity of Competitive Rivalry

There is intense competition within the tire industry which

can be attributed to a lack of product differentiation.

Although companies are starting to increase the production

of value-added products, most companies sell the same type

of tire which can breed market competition amongst the

largest players in the industry.

Overview

Goodyear Tire and Rubber Company ( NYSE: GT)

manufactures and sells tires and tire-related products across

the globe. In 2014, Goodyear represented 23.4% of all

revenue in its respective industry. This amount is the third

largest of its competitors. The firm was founded in 1898 by

by Frank Seiberling and is currently headed quartered in

Akron, Ohio. Goodyear has two main segments of

obtaining revenue: Original Equipment and Replacement.

Historically, the replacement tire segment has contributed to

70% of Goodyear’s total revenue.

Corporate Strategy

Since emerging from the depths of the Great Recession,

Goodyear has made a concerted effort to position itself to

take advantage of a recovering global economy. Goodyear

is focused on driving revenues through preserving long-

lasting relations with domestic automotive manufactures

while at the same time creating new-fresh relationships with

automotive manufactures in emerging markets.

Porter’s Five Forces

Company Analysis


Additionally, through the replacement tire segment,

Goodyear aims to realign production with new consumer

preference of high-performance tires that improve a fuel-

conscious consumer of the 21st century.

Furthermore, Goodyear management has recently made a

concerted effort to put cash back into the pockets of

shareholders. The firm has issued dividends for the past

seven quarters. This dividend payment is on par with the

industry average. Additionally, the firms plans to

repurchase 11 million stocks from 2015 to 2016. This has

impacted our model’s treasury stock forecasts.

Products

Goodyear has two distinct types of products; Public label

and Private label. Public label tires are sold under various

house brand names such as Goodyear, Kelly, Dunlop,

Debica, and Fulda. Privates label tires are typically of

higher quality and are sold at higher margins than their

public counterparts. In 2014, Goodyear released 38 new

types of tires.

In response to consumer demands, Goodyear has made an

investment in producing more high-performance tires that

improve fuel economy. Goodyear believes that this

transition will be of little to no cost as existing production

lines can easily be fitted to produce these tires. The firm

does not receive the same revenue for tires in different

regions. This is illustrated in figure 4-6. The highest

revenue per tire is from North American operations, dialing

in at $132.32. The lowest of these regions is Asia, at

$90.30.

Revenue Decomposition

Goodyear obtains revenue through two main revenues

segments: Original Equipment and Replacement. Original

Equipment segment revenue encompasses revenues received

from automotive and aircraft manufactures that install a

Goodyear-brand tire as an input. Replacement revenues are

derived from the sale of Goodyear-brand tires that are sold

to individual consumers. Goodyear uses various channels to

reach consumers for the replacement tire segment, such as

independent dealers, retailers, and wholly-owned retail

stores. As shown in figure 4-1, Goodyear has credited

approximately 70% of revenues to the replacement tire

segment and 30% of revenues to the original equipment

segment in 2014. Historically, these averages hold merit.

Goodyear report a total revenue of $18,290 million in 2014.

We believe that the economic distress of Europe will lead to

lower levels of total revenue in the short term. We feel

confident that the firmed will observe an average-annual

increase in revenues of 1.93% through 2019 and revenue

increase of 2.32% once in steady state.

Original Equipment

Original Equipment revenues stem from the firm

exchanging Goodyear-brand tires to automotive and aircraft

manufactures for proceeds. Accordingly, this revenue

stream is highly dependent on the health of the automotive

industry. As such, we believe that this segment is still in

recovery, as pre-recession annual traffic of 60 million units

in 2006 has yet to be seen. In 2014 Goodyear reported total

units sold through original equipment operations of 49.1

million, which is still substantially lower than pre-recession

figures. We believe that an important factor in this

segment’s growth will be the developing partnerships with

car manufactures in emerging markets, specifically China.

Original Equipment in Asia, which is dominated by China,

has grown by 15.73% from 2012 to 2014, as depicted by

figure 4-2. During that same time period, North American

Original Equipment has remained flat. Recently Goodyear

has opened a development center in China that aims to

better satisfy the needs of Asian car manufactures. We

believe that due to investments made in the region and an

increasing level of demand from the Chinese middle class

that the steady state growth of 5.5% is warranted for the

region’s original equipment revenue stream.


Replacement Tires

Replacement Tire revenue is generated through a variety of

different channels; independent dealers, retailers, and

wholly-owned retail stores. Consumers who purchase these

tires are simply looking to replace existing tires. With that

in mind, metrics such as Vehicle Miles Driven is a valuable

tool in gauging demand and forecasting revenues for this

segment. Additionally, Disposable Income which tracks the

portion of a consumer’s income that is available for

discretionary goods, such as tires, is important. With both

of these metrics projecting upward, we feel confident with

our replacement tire revenue annualized growth of 1.52%

before settling into our projected 2020 steady state of 2.24%

growth. As figure 4-3 illustrates, North American and

European operations contributed to over 70% of total

replacement tire revenues in 2014. It is because of this that

our model is very sensitive to economic conditions of both

regions. Additionally, by the year 2020 we believe that

Asian replacement tire operations will increase to represent

a largest proportion of total replacement revenues.

Geographical Regions

Goodyear divides operations into four geographical regions;

North America, Europe, Latin America, and Asia. North

American is what we consider the domestic market, as it

primarily dominated by the United States of America.

Europe is primarily dominated by the German markets.

Latin America is influenced primarily by Brazil. Finally,

Asia revenues mainly derive from China.

As of 2014, North America attributed to the largest

percentage of revenues at 44.44%. Europe followed second,

attributing 33.61% revenues. Together these two

geographical regions contribute to over 75% of all revenues.

With that in mind, our model is very sensitive to changes in

growth rates from these two regions.

Raw Materials Cost

Of the $12.7 billion registered to Cost of Goods Sold in

2014, approximately 38.5% is attributable to raw materials.

This is the largest bucket of costs for Goodyear. The two

main raw materials used in the creating tires are oil and

synthetic rubber. According to company guidance,

Goodyear expects to reduce the cost of raw materials by

10% in 2015 compared to 2014. We have adjusted our

model accordingly, by reducing 2015 COGS by 5% of its

traditional percent of sales forecast. This effect of reduced

raw material costs is evident in our model through 2017.

Historically, we have seen that Goodyear does pass the cost

of higher input cost onto the consumer in order to preserve

healthy operational margins. As figure 4-5 depicts, the

worldwide average price of a Goodyear-branded tire has

generally followed the price of its greatest input cost, oil.

Additionally, one third of raw materials are purchased

through foreign currencies such as Euro, Real, and the

Canadian dollar. Due to the U.S. dollar’s recent appreciate,

we project even further savings that we have adjusted into

the model for 2015 forecasts of decreasing COGS by .5%.

Labor

As of 2014 Goodyear has 69,000 employees (xi). Labor

payroll consists the second largest cost of goods sold behind

raw material inputs. Recently the firm has closed the

Amiens, France plant. According to company guidance, the

firm plans to absorb $75 million annualized savings. We

have adjusted this estimated savings into our cost of goods

sold forecasts through 2019.

Key Customers

Key customers will primary our original equipment, as there are

millions of customers within the replacement tire segment. Key

customers in North America include Ford Motor Company,

General Motors, and Boeing Company. Both Ford Motor


Company and General Motors produce automobiles and trucks

and Boeing Company produces aircrafts. On the international

front primary customers include Fiat Chrysler Automobiles

Sumitomo Rubber Industries and GB Auto SAE.

Increase in Domestic Demand

We believe that there is an increase of demand coming up

for automotive tires for both original equipment and

replacement tires. As we have stated above, original

equipment revenue is highly dependent on the automotive

sales. The month of March registered an increase of 3.62%

in auto sales compared to the prior year. Additionally, our

confidence in various economic indicators such as consumer

confidence and lower auto-loan rates give us comfort in

believing that the automotive industry will continue to see

improvements. We also believe that there is a pent-up

demand for domestic replacement tires. As figure 5-1

illustrates, the light vehicle population has historically

tracked the shipment of light vehicle tires. We believe that

this figure suggests that a substantial increase of domestic

replacement tires is on the horizon.

Figure 5-1

Expansion in China

Goodyear has set its sights on winning in China. This is

found evident through the firms announced plans to expand

an existing manufacturing plant in Pulandian, China. The

expansion of the plant is meant to meet forecasted demand

needs from consumers in China for the replacement tire

segment. Additionally, Goodyear has recently opened a

development center. The first of its kind for Goodyear in

the region. This center aims to work directly with auto

manufactures in the region. We believe this will increase

the Original Equipment revenue from the Asia Region.

Additionally, we believe that despite lower-than-normal

growth rates in China that more individuals are poised to

move into the middle class, thus sparking automotive sales.

Lower Cost of Inputs

Goodyear is set to benefit from the current low-cost

environment of raw inputs. Costs-of-goods-sold has

historically been Goodyear’s largest expense to operations.

In 2014, this expense equated to 70.39% of Goodyear’s total

revenue. Additionally, raw material inputs contribute to the

largest portion of COGS. Thus due to low input prices, the

firm will aim to better operation margins. In an industry

that competes on margins, we believe that Goodyear will

specifically benefit as they do not typically have better

margins than their competitors.

Two third of raw material inputs are influenced by the lower oil-price environment.

Second largest raw material input, synthetic rubber, price is down 23.93% in March compared to the

prior year.

Domestic auto sales, which fuel the original equipment segment, have increased 3.63% year

over year.

Americans are consuming 4.4% more in 2015 Q1 than they did compared to 2014 Q1.

The low interest rate environment fuels continued borrowing for automobile sales.

Vehicle Miles Driven continues to climb, being fueled by low gasoline prices and the adoption of

fuel efficient automobiles and tires.

Goodyear will be the first domestic tire manufacture to launch an online store for

purchasing replacement tires.

We forecast that Goodyear is able to add value to the firm through positive economic profits and

maintaining a level of return on invested capital

greater than weighted average cost-of-capital.

Operations are not diversified economically.

Revenues from Europe, which contributed to 34.07% of total revenue, is subject to economic

hardships for the Eurozone, per our projections.

Compared to competitors such as Michelin and Bridgestone, Goodyear does not have impressive

operational margins.

Despite to current low-price environment of raw materials inputs, these commodities are subject to

fluctuations.

Valuation of Summary

We have reached a BUY recommendation for Goodyear

Tire and Rubber Company. We reached this conclusion by

using the discounted cash flow, economic profit, and

relative price-to-earnings models. Using the discounted

cash flow and economic profit models we produced an

intrinsic stock price of $31.09. This intrinsic price is

Catalysts for Growth

Investment Positives

Valuation

Investment Negatives


14.18% higher than the current stock price of $27.23, thus

we feel confident in our belief that Goodyear is currently

undervalued. Additionally, using the relative P/E method of

valuation we solved for an intrinsic value of $33.26 for 2015

and a target price of $33.92 for 2016.

Due to a small pool of competitors that are publicly traded

on the New York Stock Exchange we used similar firms in

terms of market cap, price-to-earnings multiple, and

earnings-per-share. It is because some but not all in the

relative price-to-equity valuation are not in the same

industry, that we plan to put less in this intrinsic values of

$33.26 and $33.92.

We did not take our Dividend Discount Model into account,

due to Goodyear’s small track record with dividends.

Goodyear did not pay a dividends from 2004 to 2012. We

believe that the small sample size of only six quarters worth

of dividend payments along with the lack of company

guidance beyond 2016 that we do not feel confident in

forecasting dividend payments.

Revenue Decomposition & Growth Rates

The revenue stream of Goodyear can be broken into the two

operating segments of Original Equipment and Replacement

Tires. Additionally, these segments operate in four regions:

North America, Europe, Latin America, and Europe. We

project an average-annual growth of 1.99% from 2015 –

2019. We believe that Goodyear will reach a steady state

overall growth rate of 2.32% in 2020.

North America Operations

Operations in North American contributed 44.44% to total

revenues in 2014. With that in mind, revenue projections

for this region have a large impact on overall growth in our

model. Goodyear received an average revenue of $132.32

per tire sold in 2014 for North American operations. We

project an annual-average growth rate of 5% between 2015

and 2019, before settling into a 2.5% growth rate in 2020

and beyond. Revenues in North America are mainly

composed of sales from the United States, thus making the

model heavily influenced by the economic health of the

country.

The American automotive industry was hit hard during the

recession and the performance of Goodyear’s original

equipment segment is closely tied to its performance. Since

the end of the recession, North American original equipment

has yielded a return of 13.36% from 2010 to 2014. We

believe that the original equipment segment will increase

over the investment horizon due to the continued recovery

of the domestic automotive industry, a continued low-

interest rate environment, high levels of consumer

confidence, and positive growth trends in the real gross

domestic product.

Revenues stemming from replacement tires also projects to

increase over the investment horizon as well. Historically,

North American replacement tires have attributed to

approximately 40% of all tires sold. With that in mind we

believe it is imperative to gauge this specific revenue

stream. Replacement tires units sold has decreased by

15.14% from 2010 to 2014 and the price per tire sold has

had to compensate by increasing by 7.6% over this same

horizon. We believe that the cause of this drop is units sold

had been due to the heighten cost of driving. Currently, the

cost of driving has decreased substantially as the average

cost of gasoline in the United States is $2.41. This is

approximately a 40% drop in price from its high peak in

2010 Q1 and is a big variable as to why vehicle miles driven

is up 60% during this same time horizon. We believe that

2015 will post an 11% increase in replacement tire sold

compared to the prior year. Additionally, we are bullish on

the recent launch of Goodyear’s new online replacement tire

store. This new channel to reach consumers provides

Goodyear with organic growth.

Europe Operations

Operations in Europe contributed to 34.1% of total revenue

in 2014. Goodyear received an average revenue of $102.15

per tire sold in 2014 in the region as well. We project an

annualized-average growth rate of -1.8% between 2015 and

2019, before rebounding and settling into a 1% growth rate

in 2020 and beyond. The majority of revenues from this

region derive from Germany.

We believe that revenues from the European region will

ultimately be disappointing due to macro-economic factors,

as we foreseen the entire region plummeting into economic

stagnation. Additionally, Goodyear has closed a

manufacturing plant in Amiens, France that, despite cost

savings, will reduce Goodyear’s ability to service the region

properly. European revenues have decreased steadily

during the period of 2011 to 2014 by 23.13%. As unit sales

continue to drop, Goodyear has been unable to remedy with

a rise in sales price by actually lowering the revenue per tire

by 5.6%.

Asia Operations

Operations in Asia contributed to 11.45% total revenue in

2014. Goodyear received an average revenue of $90.30 per

tire sold in 2014 in the region. We project an annual-

average growth rate of 1.6% between 2015 and 2019, before

settling into a 5.5% growth rate in 2020 and beyond. A

majority of these revenues derive from operations in China.

We are optimistic with our projections in Asia, due to

Goodyear’s concerted effort to win in the region. From

2012 to 2014, the firm has increased output of tires to

automotive manufactures in the region by 15.73%.

Goodyear has recently open a development plant that is

aimed to better satisfy the needs of Asian car manufactures.

We believe that this investment will lead to higher revenue

growth, specifically in the long term, thus one reason that

we have such a high long term growth rate in our model.

Additionally, despite registering a lower-than-normal

Key Assumptions


growth of 5.5% in China, we believe that the Chinese

middle class is looking to become very polarizing force. As

more Chinese are poised to join the middle class, their need

for replacement tires will also increase. It is because of this

thinking that we feel confident in Goodyear’s replacement

tire units sold to increase by 7.87% from 2014 – 2019.

Latin America Operations

Operations in Latin America contributed to 9.9% of total

revenue in 2014. Goodyear received an average revenue of

$103.22 per tire sold in 2014 in the region as well. We

project an annualized-average growth rate of .83% between

2015 and 2019, before settling into a 1% growth rate in

2020 and beyond. Revenues in Latin American are highly

dependent on Brazil. Goodyear has recently announced the

construction of a new manufacturing plant in the Americas

that will aim to better suit the needs of consumers for the

replacement tire sector. It is still unknown if this plant will

be built in Latin or North America.

Cost of Goods Sold

Cost of Goods Sold was forecasted using a percentage of

sales which equates to a ten year weighted-average (2005 to

2014). This large sample size allows us to capture how this

cost was affected through a multitude of economic events.

Additionally, we believe a weighted average (more recent

amount will be weighted more heavily) allows us to put

more emphasis on Goodyear’s more current cost habits.

Additionally, we have artificially decreased our COGS in

year 2015 and 2016 to reflect the short term effect of the

low price environment of raw inputs. These artificial

numbers were provided by company guidance.

Research and Development

Research and Development was forecasted using a

percentage of sales which equates to a ten year weighted-

average (2005 – 2014). This percentage equates to 1.89%.

We have increased this expense by .5% in the years of 2015

and 2016 to reflect recent developments of providing

consumer with more fuel efficient tires. In 2015, Goodyear

announced that the firm is in the process of developing a tire

that would charge the battery of a car (viii). In an industry

that is has little bargaining power over the consumer, we

believe that it is in the best interested of Goodyear to

development organic growth through industry changing

products such as this.

Property Plant & Equipment/Depreciation

According to company guidance given, we can expect gross

property, plant & equipment to increase by $1,130 million

in 2015 and $1,100 million in 2016. From 2017 and beyond

we have forecasted this account to increase by the historical

average of capital expenditures. Additionally, we were

given company guidance regarding depreciation in 2015 of

$724 million. For years after this date, we have forecasted

depreciation expense as a constant average percentage of

change in gross property, plant, and equipment. This

depreciation expense is added to the prior year’s

accumulated depreciation. This accumulated depreciation

account is then subtracted from gross plant property and

equipment to equal net plant property and equipment.

Pension Liability

In February 2015, Goodyear announced that they have

funded 1.15 billion to their pension plan since the end of

2014 (xi). According to company guidance, this funding

came through the use of cash. With this development in

mind, we have forecast a zero balance for our pension

liability going forward.

Weighted Average Cost-of-Capital

The weighted average cost-of-capital for Goodyear in 2014

registered at 6.85%. This value was calculated by taking the

weighted average of cost of equity and pre-tax cost of debt.

The cost of equity was calculated using the CAPM formula.

The risk-free rate of return of 2.52% was derived from the

yield of 30 year treasury. This market risk premium of

4.62% is the 87 year geometric average provided in class.

Finally, the beta was captured using the Damodar industry

average of 1.35 (vii). Goodyear’s cost of equity equated to

6.85%. The firm’s pre-tax cost of debt was derived from the

yield from a Goodyear 30-year corporate bond. This yield

was 5.99% on a 30-year Goodyear corporate bond. As

figure 6-1 illustrates, we forecast that Goodyear is able to

add value to the firm going forward. The firm adds value

when return on invested capital is greater than the weighted

average cost-of-capital.

Economic Profit

This driver is calculated as the spread between return on

invested capital and the weighted average cost-of-capital

multiplied by the beginning invested capital. If this value is

greater than zero, then we can assume that the firm added

value. In 2014 Goodyear added economic profit of $398

million to the firm. We forecast that the firm will add an

average economic profit of $380 million during the time

period of 2015 through 2019. Additionally, we forecast an

economic profit of $350 million in steady state, which will

be reached in 2020.

Due to the fact that we value the discounted cash flow and

economic profit valuation models we have constructed four

sensitivity tests.

Sensitivity Analysis


Intrinsic Price: Beta and Risk Free Rate

We would wanted to test the capital structure of Goodyear.

The risk free rate is obtained from the yield of a 30 year

treasury bond. With the looming rise of rates, this value is

sure to change. Beta is also an important component of

capital structuring as it has a big impact on the cost of

equity. As a discretionary firm, Goodyear’s beta is subject

to volatility.

Intrinsic Price Beta

$31.09 1.15 1.20 1.25 1.30 1.35 1.40 1.45 1.50 1.55

1.00% $52.69 $49.91 $47.33 $44.93 $42.69 $40.60 $38.65 $36.82 $35.09

1.25% $49.69 $47.12 $44.74 $42.51 $40.44 $38.49 $36.67 $34.96 $33.34

1.50% $46.92 $44.55 $42.34 $40.27 $38.34 $36.53 $34.82 $33.21 $31.69

1.75% $44.36 $42.16 $40.11 $38.19 $36.38 $34.68 $33.08 $31.57 $30.14

CV Growth 2.52% $37.58 $35.81 $34.15 $32.58 $31.09 $29.69 $28.36 $27.10 $25.90

2.25% $39.79 $37.88 $36.09 $34.41 $32.83 $31.33 $29.92 $28.57 $27.30

2.50% $37.73 $35.95 $34.28 $32.70 $31.21 $29.80 $28.47 $27.20 $26.00

2.75% $35.81 $34.15 $32.58 $31.09 $29.69 $28.36 $27.10 $25.90 $24.76

3.00% $34.01 $32.45 $30.97 $29.58 $28.25 $27.00 $25.80 $24.67 $23.58

figure 7-1

WACC: Cost of Debt and Cost of Equity

Our model is highly sensitive to the discount factor of

weighted average cost of capital. The cost of equity in the

WACC calculation is crucial because the weight of equity is

58.94%. Additionally, we have estimated small changes in

the cost of debt.

WACC Cost of Equity

6.85% 6.76% 7.26% 7.76% 8.26% 8.76% 9.26% 9.76% 10.26% 10.76%

3.99% 5.10% 5.39% 5.69% 5.98% 6.27% 6.57% 6.86% 7.15% 7.45%

4.49% 5.24% 5.54% 5.83% 6.12% 6.42% 6.71% 7.01% 7.30% 7.59%

4.99% 5.39% 5.68% 5.97% 6.27% 6.56% 6.86% 7.15% 7.44% 7.74%

5.49% 5.53% 5.82% 6.12% 6.41% 6.71% 7.00% 7.30% 7.59% 7.88%

Cost of Debt 5.99% 5.67% 5.97% 6.26% 6.56% 6.85% 7.15% 7.44% 7.73% 8.03%

6.49% 5.81% 6.11% 6.40% 6.70% 6.99% 7.29% 7.58% 7.88% 8.17%

6.99% 5.96% 6.25% 6.55% 6.84% 7.14% 7.43% 7.73% 8.02% 8.32%

7.49% 6.10% 6.39% 6.69% 6.98% 7.28% 7.57% 7.87% 8.17% 8.46%

7.99% 6.24% 6.53% 6.83% 7.13% 7.42% 7.72% 8.01% 8.31% 8.60%

figure 7-2 Intrinsic Price: COGS as % of Revenue and Cost of Equity

Costs of goods sold is the largest expense absorbed by

Goodyear. As a firm that operates heavily on margins, we

were interested in the effect of the largest expense on the

intrinsic value of the stock price. As the cost of equity

raises, the effects of change COGS as a % of Revenue is

lessened.

Intrinsic Price Cost of Equity

$31.09 6.76% 7.26% 7.76% 8.26% 8.76% 9.26% 9.76% 10.26% 10.76%

64.39% $53.03 $47.64 $43.00 $38.94 $35.38 $32.21 $29.39 $26.85 $24.55

65.89% $51.66 $46.36 $41.79 $37.81 $34.30 $31.20 $28.42 $25.92 $23.67

67.39% $50.28 $45.08 $40.59 $36.68 $33.23 $30.18 $27.45 $25.00 $22.78

68.89% $48.91 $43.80 $39.39 $35.55 $32.16 $29.16 $26.48 $24.08 $21.90

COGS as % of Revenue 70.39% $47.53 $42.51 $38.19 $34.41 $31.09 $28.15 $25.52 $23.15 $21.02

71.89% $46.16 $41.23 $36.98 $33.28 $30.02 $27.13 $24.55 $22.23 $20.13

73.39% $44.78 $39.95 $35.78 $32.15 $28.95 $26.12 $23.58 $21.31 $19.25

74.89% $43.40 $38.67 $34.58 $31.02 $27.88 $25.10 $22.62 $20.38 $18.36

76.39% $42.03 $37.38 $33.38 $29.88 $26.81 $24.08 $21.65 $19.46 $17.48

figure 7-3 Intrinsic Price: WACC and ROIC CV

If returned on invested capital is greater than weighted

average cost of capital, then the firm adds value. We

wanted to illustrate how the effects of the firm adding and

losing value would have on the stock. The bottom left

portion of figure 7-4 shows the worst case scenario in terms

of adding value. In this instance WACC is much greater

than ROIC CV. The portion of the table to the top right

illustrates a best case scenario.

Intrinsic Price ROIC CV

$31.09 5.43% 5.48% 5.53% 5.58% 5.63% 5.68% 5.73% 5.78% 5.83%

5.85% $43.51 $43.79 $44.07 $44.34 $44.61 $44.88 $45.14 $45.39 $45.64

6.10% $39.59 $39.85 $40.11 $40.37 $40.62 $40.86 $41.10 $41.34 $41.57

6.35% $36.12 $36.37 $36.61 $36.85 $37.08 $37.31 $37.53 $37.75 $37.97

6.60% $33.03 $33.26 $33.48 $33.71 $33.92 $34.14 $34.35 $34.55 $34.75

WACC 6.85% $30.26 $30.47 $30.68 $30.89 $31.09 $31.29 $31.49 $31.68 $31.87

7.10% $27.75 $27.95 $28.15 $28.35 $28.54 $28.73 $28.91 $29.09 $29.27

7.35% $25.48 $25.67 $25.86 $26.04 $26.22 $26.40 $26.57 $26.74 $26.91

7.60% $23.41 $23.59 $23.77 $23.94 $24.11 $24.28 $24.44 $24.61 $24.76

7.85% $21.52 $21.69 $21.86 $22.02 $22.18 $22.34 $22.50 $22.65 $22.80

figure 7-4


i. Buearu of Economic Analysis http://www.bea.gov/

ii. http://www.investopedia.com/terms/r/realgdp.asp iii. http://investor.goodyear.com/secfiling.cfm?filingID=9

50123-15-2527&CIK=42582

iv. http://research.stlouisfed.org/fred2/series/DAUTOSA#

v. Haver Analytics vi. http://clients1.ibisworld.com/reports/us/industry/atagl

ance.aspx?entid=525

vii. http://www.rubbernews.com/article/20150410/NEWS/150419998/irsg-forecasts-global-rubber-oversupply-

by-2020

viii. http://www.wired.com/2015/03/goodyear-trying-make-electricity-generating-tire/

ix. http://www.pionline.com/article/20140213/ONLINE/140219925/goodyear-freezes-us-hourly-pension-plans-

vulcanizes-db-plans-with-115-billion

x. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/Betas.html

xi. http://clients1.ibisworld.com/reports/us/industry/productsandmarkets.aspx?entid=525

xii. http://clients1.ibisworld.com/reports/us/bed/default.aspx?bedid=4149

xiii. http://clients1.ibisworld.com/reports/us/industry/competitivelandscape.aspx?entid=525

xiv. http://clients1.ibisworld.com/reports/us/industry/majorcompanies.aspx?entid=525

xv. http://clients1.ibisworld.com/reports/us/industry/operatingconditions.aspx?entid=525

xvi. http://clients1.ibisworld.com/reports/us/industry/keystatistics.aspx?entid=525

xvii. http://clients1.ibisworld.com/reports/us/bed/default.aspx?bedid=990038

xviii. http://advantage.marketline.com/Product?pid=D0DAB640-F767-45F7-A5E5-0C1522B746BA

xix. http://www.indexmundi.com/commodities/?commodity=rubber&months=120

xx. (http://www.bls.gov/web/ppi/ppi_dr.pdf) xxi. http://www.rubbernews.com/article/20150415/NEWS/

304069995/goodyear-opens-center-in-china

xxii. http://www.tirebusiness.com/article/20150414/NEWS/150419962/goodyear-talks-up-long-term-growth-

online-tire-site-rolls-out

xxiii. http://projects.wsj.com/econforecast/#ind=gdp&r=12 xxiv. http://clients1.ibisworld.com/reports/us/industry/major

companies.aspx?entid=525#MP9105

xxv. http://clients1.ibisworld.com/reports/us/industry/majorcompanies.aspx?entid=525#MP9105

xxvi. http://advantage.marketline.com/Product?pid=D0DAB640-F767-45F7-A5E5-0C1522B746BA

Important Disclaimer

This report was created by students enrolled in the Security

Analysis (6F:112) class at the University of Iowa. The report

was originally created to offer an internal investment

recommendation for the University of Iowa Krause Fund and

its advisory board. The report also provides potential

employers and other interested parties an example of the

students’ skills, knowledge and abilities. Members of the

Krause Fund are not registered investment advisors, brokers

or officially licensed financial professionals. The investment

advice contained in this report does not represent an offer or

solicitation to buy or sell any of the securities mentioned.

Unless otherwise noted, facts and figures included in this

report are from publicly available sources. This report is not

a complete compilation of data, and its accuracy is not

guaranteed. From time to time, the University of Iowa, its

faculty, staff, students, or the Krause Fund may hold a

financial interest in the companies mentioned in this report.

GoodyearKey Assumptions of Valuation Model

Ticker Symbol GT Tax RatesCurrent Share Price $27.23Current Model Date 2/18/2015 Federal 240Fiscal Year End Dec. 31 Foreign: ‐37

State: 12Pre‐Tax Cost of Debt 5.99% Pretax Income 687Beta 1.35 Total: 31.30%Risk‐Free Rate 2.52%Market Return 7.14%Equity Risk Premium 4.62%CV Growth of EPS 3.50%Current Dividend Yield 0.9%Effective Tax Rate 31%CV ROIC 5.63%CV Growth 2.00%Cost of Equity 8.76%WACC 6.85%

Goodyear Revenue Decompositionin millionsFiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020SS

Tires 20,992 19,540 18,138 18,290 18,617 19,215 19,372 19,949 20,412

Engineered Products ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Total Revenue 20,992 19,540 18,138 18,290 18,617 19,215 19,372 19,950 20,414

Units Sold (in millions of tires)

North America 62.6 61.7 61.1 67.82 73.25 76.91 76.14 77.66 79.60

international 101.5 100.6 101.4 93.58 89.70 90.91 93.57 97.38 99.56Worldwide Total 164.1 162.3 162.5 161.40 162.95 167.82 169.71 175.04 179.16

YoY % Chance ‐9.14% ‐1.10% 0.12% ‐0.68% 0.96% 2.99% 1.13% 3.14% 2.35%

Worldwide Units Sold (in millions of tires)

Replacement 114.4 111.9 112.9 112.48 113.56 116.86 118.07 121.72 124.44

Original Equipment 49.6 50.4 49.1 48.92 49.39 50.96 51.64 53.32 54.72

Worldwide Units Total 164.0 162.3 162.0 161.40 162.95 167.82 169.71 175.04 179.16

Tire Revenue (in millions) 20992 19540 18138 18290.35 18617.10 19214.73 19371.94 19948.88 20412.49

Worldwide Revenue per Tire ###### 120.39$ 111.96$ 269.69$ 254.17$ 249.84$ 254.43$ 256.87$ 256.42$

YoY % Chance

Replacement ‐13.46% ‐2.19% 0.89% ‐0.37% 0.96% 2.90% 1.04% 3.09% 2.24%

OE Tire Unites 2.48% 1.61% ‐2.58% ‐0.36% 0.95% 3.19% 1.33% 3.26% 2.62%

Total Tire Units ‐9.19% ‐1.04% ‐0.18% ‐0.37% 0.96% 2.99% 1.13% 3.14% 2.35%

tires)

Replacement 44.5 42.9 43.0 47.73 51.55 54.13 53.58 54.66 56.02

OE Tire Unites 18.1 18.8 18.1 20.09 21.70 22.78 22.56 23.01 23.58

Total Tire Units 62.6 61.7 61.1 67.82 73.25 76.91 76.14 77.66 79.60Tire Revenue (in Millions) 9666.0 8684.0 8085.0 8974.35 9692.30 10176.91 10075.14 10276.65 10533.56Revenue Per Tire ###### 140.75$ 132.32$ 132.32$ 132.32$ 132.32$ 132.32$ 132.32$ 132.32$

YoY % Chance

Replacement ‐11.00% ‐3.60% 0.23% 11.00% 8.00% 5.00% ‐1.00% 2.00% 2.50%

OE Tire Unites 13.13% 3.87% ‐3.72% 11.00% 8.00% 5.00% ‐1.00% 2.00% 2.50%

Total Tire Units ‐5.15% ‐1.44% ‐0.97% 11.00% 8.00% 5.00% ‐1.00% 2.00% 2.50%

International Segment(in millions of tires)

Replacement 69.9 69.0 69.9 64.75 62.02 62.73 64.49 67.07 68.42

OE Tire Units 31.5 31.6 31.5 28.83 27.69 28.18 29.08 30.31 31.14

Total Tire Units 101.4 100.6 101.4 93.58 89.70 90.91 93.57 97.38 99.56Tire Revenue (in Millions) 11,326 10,856 10,053 9316.00 8924.80 9037.82 9296.79 9672.24 9878.93Revenue Per Tire ###### 107.91$ 99.14$ 99.55$ 99.49$ 99.41$ 99.35$ 99.33$ 99.23$

YoY % Change

Replacement ‐14.96% ‐1.29% 1.30% ‐7.36% ‐4.23% 1.16% 2.80% 4.00% 2.02%

OE Tire Unites ‐2.78% 0.32% ‐0.32% ‐8.48% ‐3.97% 1.78% 3.21% 4.23% 2.71%

Total Tire Units ‐11.52% ‐0.79% 0.80% ‐7.71% ‐4.15% 1.35% 2.93% 4.07% 2.24%

Europe Segment(in millions of tires)

Replacement 46.4 44.2 43.7 39.33 36.97 37.34 38.09 39.61 40.01


Total Tire Units 62.7 60.8 60.5 54.45 51.18 51.69 52.73 54.84 55.39Tire Revenue (in Millions) 6884 6567 6180 5562.00 5228.28 5280.56 5386.17 5601.62 5657.64

Revenue Per Tire ####### 108.01$ 102.15$ 102.15$ 102.15$ 102.15$ 102.15$ 102.15$ 102.15$

YoY % Change in Tire Units ‐15.61% ‐3.03% ‐0.49% ‐10.00% ‐6.00% 1.00% 2.00% 4.00% 1.00%

Latin America Segment(in millions of tires)

Replacement 11.8 12.4 13.5 13.23 13.10 12.97 13.36 13.76 13.96


Total Tire Units 18.1 17.9 17.4 17.1 16.9 16.7 17.2 17.7 18.0

Tire Revenue (in Millions) 2085 2063 1796 1,760.08 1,742.48 1,725.05 1,776.81 1,830.11 1,857.56

Revenue Per Tire ######## $ 115.25 $ 103.22 $ 103.22 $ 103.22 $ 103.22 $ 103.22 $ 103.22 $ 103.22

YoY % Change in Tire Units ‐8.59% ‐1.10% ‐2.79% ‐2.00% ‐1.00% ‐1.00% 3.00% 3.00% 1.50%

Asia Segment(in millions of tires)

Replacement 11.7 12.4 12.7 12.19 11.95 12.43 13.05 13.70 14.45


Total Tire Units 20.6 21.9 23 22.08 21.64 22.50 23.63 24.81 26.18

Tire Revenue (in Millions) 2357 2226 2077 1993.92 1954.04 2032.20 2133.81 2240.50 2363.73Revenue Per Tire ####### 101.64$ 90.30$ 90.30$ 90.30$ 90.30$ 90.30$ 90.30$ 90.30$

YoY % Change in Tire Units 0.49% 6.31% 5.02% ‐4.00% ‐2.00% 4.00% 5.00% 5.00% 5.50%

Net Sales By Region (in Millions)

North America 9666 8684 8085 8,974 9,692 10,177 10,075 10,277 10,534

Europe 6884 6567 6180 5,562 5,228 5,281 5,386 5,602 5,658

Latin America 2085 2063 1796 1,760 1,742 1,725 1,777 1,830 1,858

Asia 2357 2226 2077 1,994 1,954 2,032 2,134 2,241 2,364

Total International 11326 10856 10053 9,316 8,925 9,038 9,297 9,672 9,879

total Tire Rev 20992 19540 18138 18,290 18,617 19,215 19,372 19,949 20,412

Engineered Products

Total Rev 20992 19540 18138 18,290 18,617 19,215 19,372 19,949 20,412

YoY % Change in Sales Forecast Forecast Forecast Forecast Forecast ForecastNorth America ‐1.96% ‐10.16% ‐6.90% 11.00% 8.00% 5.00% ‐1.00% 2.00% 2.50%

Europe ‐14.38% ‐4.60% ‐5.89% ‐10.00% ‐6.00% 1.00% 2.00% 4.00% 1.00%

Latin America ‐15.66% ‐1.06% ‐12.94% ‐2.00% ‐1.00% ‐1.00% 3.00% 3.00% 1.50%

Asia ‐1.63% ‐5.56% ‐6.69% ‐4.00% ‐2.00% 4.00% 5.00% 5.00% 5.50%

Total International ‐12.26% ‐4.15% ‐7.40% ‐7.33% ‐4.20% 1.27% 2.87% 4.04% 2.14%

total Tire Rev ‐7.80% ‐6.92% ‐7.18% 0.84% 1.79% 3.21% 0.82% 2.98% 2.32%

Engineered Products

Total Rev ‐7.80% ‐6.92% ‐7.18% 0.84% 1.79% 3.21% 0.82% 2.98% 2.32%

GoodyearBalance Sheetin millionsFiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020SSAssets

Current Assets

Cash & Short-Term Investments 2,281 2,996 2,161 4,064 5,215 5,537 4,633 9,866 6,807

Accounts Receivables, Net 2,563 2,435 2,126 2,492 2,629 2,810 3,129 2,831 3,429

Inventories 3,250 2,816 2,671 2,838 2,982 3,366 3,198 3,145 3,696

Prepaid Expenses & Other Current Assests 404 397 766 346 352 363 366 377 386

Total Current Assets 8,498 8,644 7,724 9,740 11,179 12,076 11,326 16,219 14,318

Long Term Assets

Property, Plant & Equipment - Gross 15,947 16,478 16,184 16718 16418 17046 18152 19291 20465

Less Accumulated Depreciation 8,991 9,158 9,031 9755 10509 11294 12112 12963 13850

Net Property, Plant & Equipment 6,956 7,320 7,153 6963 5909 5752 6040 6327 6615

Total Investments and Advances 41 49 51 52 52 53 54 55 56

Goodwill 664 668 601 601 601 601 601 601 601

Gross Other Intangibles 140 138 138 155 155 155 155 155 155Less Amortization ‐ ‐ ‐ 1 2 3 4 5 6

Net Other Intangibles 140 138 138 154 153 152 151 150 149

Deferred Tax Assets 186 157 1,762 109 109 109 109 109 109

Other Assets 488 551 680 680 680 680 680 680 680

Total Assets 16,973 17,527 18,109 18,299 18,683 19,424 18,961 24,142 22,528

Liabilities & Shareholders' Equity

Notes Payable 102 14 30 155 162 178 182 173 205

Current Portion of LT Debt 96 73 148 148 446 400 183 1923 800Accounts Payable 3,223 3,097 2,878 2,508 2,553 2,635 1,718 1,875 2,517

Income Tax Payable ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Accrued Payroll 719 758 724 743 756 781 787 811 829

Other Current Liabilities 1,182 1,083 956 956 956 956 956 956 956

Total Current Liabilities 5,322 5,025 4,736 4,510 4,874 4,950 3,826 5,738 5,307

Long Term Liabilities

Long-Term Debt 4,888 6,162 6,216 5,198 4,411 4,294 4,206 6,689 4,765

Provision for Risks & Charges ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Deferred Tax Liabilities 264 256 181 261 261 261 261 261 261

Warranty Liabilities 24 21 17 19 19 19 19 19 19

Pension Liability 4,340 2,673 1,676 ‐ ‐ ‐ ‐ ‐ ‐

Other Long term Liabilities 976 945 856 2,532 2,532 2,532 2,532 2,532 2,532

Total Liabilities 15,814 15,082 13,682 12,519 12,097 12,055 10,844 15,238 12,883

Preferred Stock (Carrying Value) 500 500 ‐ ‐ ‐ ‐ ‐ ‐ ‐

Common Stock 3,060 3,095 3,410 3,417 3,443 3,469 3,472 3,482 3,524

Teasury Stock ‐ ‐ ‐ 6 5 ‐ ‐ ‐ ‐

Retained Earnings 1,424 2,087 4,548 5,899 6,681 7,431 8,176 8,953 9,652

Accumulated Other Comprehensive Income (4,725) (4,183) (4,546) (4,546) (4,546) (4,546) (4,546) (4,546) (4,546)

Total Shareholders' Equity 259 1,499 3,412 4,765 5,572 6,354 7,103 7,889 8,630

Accumulated Minority Interest 900 946 1,015 1,015 1,015 1,015 1,015 1,015 1,015

Total Equity 1,159 2,445 4,427 5,780 6,587 7,369 8,118 8,904 9,645

Total Liabilities & Shareholders' Equity 16,973 17,527 18,109 18,299 18,684 19,424 18,962 24,143 22,528

Income Statementin millionsFiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020SSNet Revenue 20,992 19,540 18,138 18,290 18,617 19,215 19,372 19,949 20,412

COGS 16,080 14,285 12,768 12,052 12,826 13,622 13,733 14,142 14,471

Depreciation 684 719 730 724 754 785 818 852 887

Amortization of Intangibles 3 3 2 1 1 1 1 1 1

Gross Income 4,225 4,533 4,638 5,514 5,037 4,807 4,820 4,954 5,054

SG&A Expense 3,088 3,148 2,720 2,469 2,885 2,978 3,002 3,091 3,163

Research & Development 370 390 399 512 503 362 365 369 362

EBIT (Operating Income) 1,137 1,385 1,519 2,533 1,649 1,467 1,453 1,494 1,529

Nonoperating Income - Net (131) 5 (178) ‐ ‐ ‐ ‐ ‐ ‐

Interest Expense 357 448 505 374 321 274 268 263 411

Unusual Expense - Net 209 129 102 ‐ ‐ ‐ ‐ ‐ ‐

Pretax Income 440 813 687 2,159 1,328 1,193 1,185 1,231 1,118

Income Taxes 203 138 (1,834) 676 416 373 371 385 350

Consolidated Net Income 237 675 2,521 1,483 913 820 814 846 768

Minority Interest 25 46 69 69 69 69 69 69 69

Net Income 212 629 2,452 1,414 844 751 745 777 699

Preferred Dividends 29 29 7

Net Income available to Common 183 600 2,445 1,414 844 751 745 777 699

EPS 1.33 2.60 9.02 5.36 3.25 2.88 2.85 2.96 2.64

Total Shares Outstanding 245.24 248.00 269.00 264 260 261 261 262 265

Cash Dividends 12 59 63 62

GoodyearCash Flow Statementin millionsFiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020SSCash Flow

Operating Activities

Adjustments to reconcile net cash by operating activities:

Net Income / Starting Line 237 675 2,521 1,414 844 751 745 777 699

Depreciation 684 719 730 724 754 785 818 852 887

Amortization 3 3 2 1 1 1 1 1 1

Change in Deffered Liabilities 20 (8) (75) 80 - - - - -

Change in Deffered Assets (41) 29 (1,605) 1,653 - - - - -

Change in Working Capital:

Receivables 286 128 309 (366) (138) (180) (319) 298 (598)

Inventories 606 434 145 (167) (144) (384) 167 53 (551)

Prepaid Expenses & Other Assets (69) 7 (369) 420 (6) (11) (3) (11) (9)

Accounts Payable (445) (126) (219) (370) 45 82 (917) 157 642

Income Taxes Payable - - - - - - - - -

Other Current Liabilities 132 (99) (127) - - - - - -

Accrued Payroll (80) 39 (34) 19 13 24 6 23 19

Net Operating Cash Flow 1,333 1,801 1,278 3,408 1,369 1,067 499 2,150 1,090

Investing Activities

Capital Expenditures (943) (531) 294 ‐534 300 ‐628 ‐1105 ‐1139 ‐1174

Total Investments and Advances - (8) (2) ‐1 ‐1 ‐1 ‐1 ‐1 ‐1

Net Goodwill (10) (4) 67 - - - - - -

Other Assets (43) (63) (129) - - - - - -

Net Other Intangibles 17 2 - (17) - - - - -

Pension Liabilities 338 (1,667) (997) (1,676) - - - - -

Other Long Term Libabilities (45) (31) (89) 1,676 - - - - -

Net Investing Cash Flow (686) (2,302) (856) ‐552 299 ‐629 ‐1106 ‐1140 ‐1175

Financing Activities

Common Stock 7 35 315 7 26 26 3 10 42

Dividends Paid 0 ‐12 ‐47 ‐63 ‐62 0 0 0 0

Treasury Stock 0 0 0 -6 0 5 0 0 0

Change in Current Portion of LT Debt (214) (111) 91 - 298 (46) (217) 1,740 (1,123)

Change in Notes Payable 125 8 16 4 (9) 32

Change in Accumulated Minority Interest 25 46 69 - - - - - -

Change in Long-Term Debt 99 1,274 54 (1,018) (787) (117) (88) 2,483 (1,924)

Change in Other Comprehensive Income (4,725) 542 (363) - - - - - -

Change in Warrenty 4 (3) (4) 2 - - - - -

Net Financing Cash Flow ‐4804 1771 115 ‐953 ‐517 ‐116 ‐297 4223 ‐2974

Net Change in Cash (491) 715 (835) 1,903 1,151 322 (905) 5,233 (3,059)

add beginning Cash 2772 2281 2996 2161 4064.149 5215.3844 5537.445 4632.911 9865.9322Ending Cash 2,281 2,996 2,161 4,064 5,215 5,537 4,633 9,866 6,807

GoodyearCommon Size Balance Sheet

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020SSAssets

Current Assets

Cash & Short-Term Investments 10.87% 15.33% 11.91% 22.22% 28.01% 28.82% 23.92% 49.46% 33.35%Accounts Receivables, Net 12.21% 12.46% 11.72% 13.62% 14.12% 14.62% 16.15% 14.19% 16.80%Inventories 15.48% 14.41% 14.73% 15.52% 16.02% 17.52% 16.51% 15.77% 18.11%Prepaid Expenses & Other Current Assests 1.92% 2.03% 4.22% 1.89% 1.89% 1.89% 1.89% 1.89% 1.89%Total Current Assets

Long Term Assets

Net Property, Plant & Equipment 33.14% 37.46% 39.44% 38.07% 31.74% 29.94% 31.18% 31.72% 32.41%Property, Plant & Equipment - Gross 75.97% 84.33% 89.23% 91.40% 88.19% 88.71% 93.70% 96.70% 100.26%Accumulated Depreciation 42.83% 46.87% 49.79% 53.33% 56.45% 58.78% 62.52% 64.98% 67.85%Total Investments and Advances 0.20% 0.25% 0.28% 0.28% 0.28% 0.28% 0.28% 0.28% 0.27%Net Goodwill 3.16% 3.42% 3.31% 3.29% 3.23% 3.13% 3.10% 3.01% 2.94%Net Other Intangibles 0.67% 0.71% 0.76% 0.85% 0.83% 0.81% 0.80% 0.78% 0.76%Deferred Tax Assets 0.89% 0.80% 9.71% 0.60% 0.59% 0.57% 0.56% 0.55% 0.54%Other Assets 2.32% 2.82% 3.75% 3.72% 3.65% 3.54% 3.51% 3.41% 3.33%Total Assets 80.85% 89.70% 99.84% 100.05% 100.35% 101.09% 97.88% 121.02% 110.36%

Liabilities & Shareholders' Equity

ST Debt & Curr. Portion LT Debt 0.49% 0.07% 0.17% 0.85% 0.87% 0.93% 0.94% 0.87% 1.00%Accounts Pay

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