JP Morgan Still Likes Goodyear, Boosts EPS And Price Target

In a report published Monday, JP Morgan analyst Ryan Brinkman maintained an Overweight rating on Goodyear Tire & Rubber Co (NASDAQ: GT), while raising the price target from $35 to $36.

"Goodyear announced last week the dissolution of its 16 year global alliance with Sumitomo Rubber Industries (SRI) in a transaction expected to close in 4Q15. The agreement brings to a resolution arbitration proceedings commenced by Goodyear in early 2014 claiming anticompetitive conduct by Sumitomo," Brinkman reported.

According to the agreement, the two companies will end its joint ventures partnerships in North America, Europe and Asia. Goodyear will gain full ownership of the European joint venture, along with one of the two joint ventures in Japan. The company will also retain its rights to sell Dunlop tires in most North American and European market segments.

"Goodyear and SRI have established long-term off-take agreements to ensure uninterrupted supply to customers despite change in ownership of the various plants previously owned jointly by the alliance. The net effect of the transaction to Goodyear's consolidated revenue and Segment Operating Income (SOI) is expected to be relatively benign but net income is estimated to benefit by +$40 mn to +$50 mn annually from a reduction in noncontrolling interest expense, given GT's assumption of full ownership of the European venture," the JP Morgan report stated.

Goodyear reiterated its medium-term financial goals, including annual SOI growth of over 10-15 percent. The company also stated that the $271 million to be paid to SRI had already been factored into its 2014-2016 capital allocation plan.

The EPS estimate for 2016 has accordingly been raised from $3.70 to $3.86, while the revenue and SOI estimates for 2016 have been lowered by $104 million and $15 million, respectively. However, the net income estimate for 2016 has been raised by $41 million to account for the decline in non-controlling interest expenses.