wsom bafi 403 – goodyear tire & rubber company valuation valuation project bafi 403 12/08/2007...
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- WSOM BAFI 403 Goodyear Tire & Rubber Company Valuation Valuation Project BAFI 403 12/08/2007 Johannes Albrecht Ryan Arlia Jim Reese Siddharth Sharma Peter Zale
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- 2WSOM BAFI 403 Goodyear Tire & Rubber Company Valuation Executive Summary Goodyear Tire and Rubber Company has gone through great change in the last ten years, barely skirting bankruptcy as it dealt with recession, labor difficulties and changing demand in the tire market. Avoiding default by mere days, it has rebounded to become a buy in most analysts portfolios. Goodyear began its transformation by realizing the growth market for tires was moving away from the commodity-based low margin tires it had featured to higher margin differentiated tires for targeted markets. The strategy requires Goodyear be less leveraged and more equity financed as the risk of selling differentiated tires is greater than that of cheaper commodity tires. Goodyears excessive level of debt could not allow for any more risk. Goodyear is changing from being a highly leveraged high dividend producing company to being a no to low dividend growth company, featuring differentiated tires given value by Goodyears superior R&D capability and its worldwide brand equity. Based on our assessment of Goodyears current financial and market structure, have set a price target of $40 for Goodyears common stock.
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- 3WSOM BAFI 403 Goodyear Tire & Rubber Company Valuation Summary Slide Company Background Executive Summary Industry Information Goodyear Positioning Goodyear Strategy Competitive Analysis Financial Analysis Cash Flow Analysis Valuation Analysis 3 Economic Scenarios and Assumptions Best Estimates Appendix
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- 4WSOM BAFI 403 Goodyear Tire & Rubber Company Valuation Company Background The Goodyear Tire and Rubber Company was founded in 1898 by F. A. Seiberling in Akron, OH. Goodyear specializes in the design, manufacture and distribution of tires for automotive and industrial applications. They operate 60 plants in 26 countries for distribution to 185 countries around the globe. Revenues are generated through five operating units based on geographic regions North America, Latin America, European Union, Asia Pacific, and Eastern Europe (which includes the Middle East and Africa). Goodyear had 2006 revenues of $20.3 billion on the sale of 215 million tire units. In 2007, Goodyear sold off its Engineered Products division, which accounted for approximately $1.5 billion in sales for 2006
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- 5WSOM BAFI 403 Goodyear Tire & Rubber Company Valuation Industry Information The tire industry sells through two basic channels: Original Equipment auto manufacturers (OE) Replacement The original equipment market has traditionally been an outlet where manufacturers could sell many units of guaranteed business while minimizing SKUs. In addition, the fitments on popular vehicles would result in replacement sets of the same brand when the originals wore out. Today, with the popularity of leases and higher vehicle turnover, this logic no longer holds true. The OE business is still a good source of high volume but most fitments are either provided at a financial loss or a very small margin. The replacement market has become a much more profitable segment for tire makers. The popularity of large diameter aftermarket wheels has created a sweet spot in the industry for manufacturers who can produce large bead diameter tires margins on these units can be well over $100 per tire.
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- 6WSOM BAFI 403 Goodyear Tire & Rubber Company Valuation Goodyear Positioning In 2003 Goodyear was on the brink of bankruptcy. They were overloaded with debt and suffering from years of mis-management. In 1998 Goodyear had net income of nearly $700 million, by 2002, they were loosing nearly $1 billion per year. Goodyear had sought a growth strategy that involved acquiring businesses to grow market share. Many smaller tire companies were purchased around the globe. This strategy culminated in the purchase of 75% of Dunlop Tires from SRI in 1999 for $125 billion. All of this consolidation activity put Goodyear deep in debt. The weak economy that followed combined with Goodyears failure to capitalize on the newly acquired brands lead to a string of financial losses for the years 2001-2003. Goodyear is now in the 4 th year of their turnaround plan. Much attention has been put on improvement in leadership, products, quality, cost and finances. Steady improvement has been achieved and the Goodyear management team believes that they have turned the corner and are gaining momentum towards profitability.
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- 7WSOM BAFI 403 Goodyear Tire & Rubber Company Valuation Goodyear Strategy Goodyear has stated the following strategies to achieve their long and short term goals: Improved Product Mix De-leveraging of the firm Cost Saving
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- 8WSOM BAFI 403 Goodyear Tire & Rubber Company Valuation Goodyear Strategy Improved Product Mix Revitalize brand image and position brands for greater market differentiation Goodyear, Dunlop, and Kelly brands Focus development on premium branded products Recent activity includes launches of highly successful ICON products including Assurance, Wrangler, Fortera, and Eagle products Reduce unit volume on value-line tires that have low profitability Exited 8 million units of private brand tires in 2006 Invest in capacity for larger rim diameter tires Source: Goodyear 3Q2007 Earnings Presentation, Goodyear.com
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- 9WSOM BAFI 403 Goodyear Tire & Rubber Company Valuation Goodyear Strategy Cost Saving Continuous improvement/USWA union contract Footprint reduction Asia sourcing SAG reduction VEBA Insurance Deal Source: Goodyear 3Q2007 Earnings Presentation, Goodyear.com Gross Anticipated Savings: $1.8 - $2.0 Billion Over 4 Years
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- 10WSOM BAFI 403 Goodyear Tire & Rubber Company Valuation Goodyear Strategy De-leveraging/Improved Balance Sheet Reduce long term debt* 2006 sold Farm Business Unit 2007 sold Engineered Products Unit ($1.4 billion) 2007 equity offering ($833 million) Source: Goodyear 3Q2007 Earnings Presentation, Goodyear.com *Reduced LT debt from $7.2B in Dec 06 to $5.0B in Sept. 07
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- WSOM BAFI 403 Goodyear Tire & Rubber Company Valuation Competitive and Financial Analyses
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- 12WSOM BAFI 403 Goodyear Tire & Rubber Company Valuation Competitive Analysis Business Analysis In the first part of this section, current industry conditions as well as historical developments in the industry are described in order to establish a qualitative framework for the subsequent financial analysis. Industry Analysis The following Porter analysis provides insights into each major tire industry players profit potential within the industry, given each firms intentions to compete and their specific aims to exploit synergies across the range of businesses in which they operate.
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- 13WSOM BAFI 403 Goodyear Tire & Rubber Company Valuation Competitive Analysis 5 forces Analysis The above table shows that each of the major tire companies faces pretty much the same competitive landscape and industry pressures. Also the table shows that, from a Porter perspective, the tire industry is relatively unattractive with three areas scoring High. Raw material suppliers can exercise high pressure on the prices for their input materials in tire manufacturing due to strong competition in a rather commoditized market. Buyers can exercise high power which keeps prices low. Threat of substitutes is low which is favorable for the existing players. Threat of new entry is low since new entrants are rather not attracted due to the commodity nature of the environment. Also initial costs of entry (creating a manufacturing capability) are high. However, new competition is seen in growing markets such as China, which already has impacted the threat of the new entrants-pressure structure. That said, each of the major players differentiates itself from its competitors in unique ways relating to diversification (Continental), footprint (Bridgestone), premium brand (Michelin) and overall reputation and reputation for new product development (Goodyear).
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- 14WSOM BAFI 403 Goodyear Tire & Rubber Company Valuation Competitive Analysis SWOT Analysis Competitor Analysis: Goodyear (USA), Michelin (FR), Bridgestone (JP), Continental Tire (GE). In the SWOT analysis we begin to see some of the differentiation occurring between the major players in the tire industry. We also see the similar threats faced more or less by all of them.
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- 15WSOM BAFI 403 Goodyear Tire & Rubber Company Valuation Competitive Analysis Market, Segment and Products Over the last ten years, Goodyear, Bridgestone, Michelin and Continental have all faced challenges presented by rising raw material costs and a global excess in manufacturing capacity. Petroleum, steel, and natural rubber are the primary materials used in tires and prices rose greatly over the last few years. Stagnating markets in North America and the European Union, along with the expansion of manufacturing capacities in Asia means that more tires can be made than can be sold.
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- 16WSOM BAFI 403 Goodyear Tire & Rubber Company Valuation Competitive Analysis Market, Segment and Products (Cont.) To counteract these conditions, each company has adopted a different strategy and foc
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