On Wednesday, JPMorgan (NYSE:JPM) updated its financial outlook on Goodyear Tire & Rubber (NASDAQ:GT), raising the stock's price target to $18.00 from the previous $17.00 while maintaining an Overweight rating. The adjustment comes in light of Goodyear's third-quarter performance, which surpassed expectations, and the anticipated trends for the upcoming fourth quarter.
The analyst at JPMorgan noted that despite the stronger than anticipated third-quarter results, weaker underlying demand trends are expected to persist into the fourth quarter. This has led to a revision of the Segment Operating Income (SOI) estimate for 2024, now set at $1,298 million, down from the initial $1,330 million forecast.
The 2025 SOI projection has also been adjusted to $1,525 million from $1,550 million. These revised figures incorporate an estimated $80 million impact from the anticipated sale of Goodyear's Off-The-Road (OTR) business, assuming the deal closes by the end of 2024.
For the fourth quarter, the JPMorgan analyst projects an SOI of $365 million, a decrease from the prior estimate of $415 million. The forecast for free cash flow, excluding restructuring payments, is expected to fall below breakeven in the fiscal year 2024 but is predicted to turn positive in fiscal year 2025.
The new price target of $18 is based on the firm's December 2026 estimates, as opposed to the previous target of $17, which was based on the earlier 2025 estimates. The lowered SOI expectations are balanced by the projected proceeds from the sale of the OTR business, which is valued at approximately $0.9 billion, or roughly $0.8 billion after taxes. This sale is calculated at around 9 times the EV/EBITDA ratio, a figure significantly higher than Goodyear's current consolidated trading multiple of approximately 5 times.
In other recent news, Goodyear Tire & Rubber Company reported third-quarter earnings that exceeded analyst expectations and revised its transformation targets upwards. The company posted adjusted earnings per share of $0.37, surpassing the analyst consensus estimate of $0.22, although revenue of $4.82 billion was slightly below the projected $4.96 billion. Goodyear reported a net loss of $34 million, an improvement from a loss of $89 million in the same quarter last year.
In terms of operational performance, segment operating income rose to $347 million from $336 million a year ago, and the segment operating margin expanded by 70 basis points year-on-year to 7.2%. The company's CEO, Mark Stewart, attributed this to the successful execution of their Goodyear Forward transformation plan.
Goodyear has increased its target for gross run-rate gains from the transformation plan to $1.5 billion by the end of 2025, a $200 million increase from the original goal. The company now expects $450 million in gross benefits from the plan in 2024. Despite a decline in third-quarter tire unit volumes and a slight dip in revenue compared to the prior year, Goodyear maintains its target of achieving a 10% segment operating income margin by the fourth quarter of 2025.
InvestingPro Insights
To complement JPMorgan's analysis, recent data from InvestingPro offers additional context on Goodyear Tire & Rubber's financial position. The company's market capitalization stands at $2.63 billion, reflecting its current market valuation. Despite JPMorgan's optimistic price target, InvestingPro data indicates that Goodyear has been facing challenges, with a significant -35.54% year-to-date price return as of the latest available data.
InvestingPro Tips highlight that Goodyear is "operating with a significant debt burden" and is "quickly burning through cash," which aligns with JPMorgan's concerns about free cash flow being below breakeven in fiscal year 2024. However, there's a silver lining as analysts predict the company will be profitable this year, potentially supporting JPMorgan's maintained Overweight rating.
For investors seeking a more comprehensive analysis, InvestingPro offers 7 additional tips that could provide deeper insights into Goodyear's financial health and market position.
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