A FREE CALL OPTION ON GOODYEAR´S NEW GAME CHANGING PRODUCT

Summary

  • Goodyear might be an attractive short-term and long-term opportunity.
  • In 1H15 Goodyear plans industrialisation of its new AMT technology. A success could mean a material upside for Goodyear. Downside is limited as market assigns zero value to the project.
  • On 7/30 Goodyear reported its results. The market over-reacted to weak revenue guidance and gave no credit to costs savings achieved. Attractive entry point for investors.

My investment approach

My investment approach is simple – I look for special situations and special opportunities. Many of my ideas start with reading newspapers. I find an idea, analyze it and make an investment decision. My 2014 return was 41%. Some of the ideas I made money on last year are described in my previous articles. The below idea is based on detailed analysis of many articles and materials and discussions with industry experts over a 3 months period.

Profit from game changing product

My latest idea is Goodyear (GT). GT is about to bring a new product to the market. The technology is called Air Maintenance Technology or AMT. The technology was named one of 2012’s best inventions by the Time magazine. The idea is a tire that can pump itself by rotating to maintain tire pressure at a constant level. It utilizes a peristaltic pump technology. Basically there is a small pipe that is molded in the side wall of the tire and as the tire rotates the pipe is squeezed at the bottom and that pushes the air into the tire.

Most personal and commercial vehicles have under-inflated tires, which results in: (i) higher fuel costs, (ii) reduction in tire life, (iii) increased likelihood of tire breakdown, (iv) reduced safety. The new product should resolve the issue. It took Goodyear more than five years to develop and the launch is planned for first half of 2015.

Goodyear got financial support from DoE to develop the product. Goodyear annually reports to DoE its progress. The presentations are publicly available on DoE web site (see the link to the June 2014 presentation below this article). These presentations were the main source of information for this article.

Goodyear is planning to launch the AMT first on truck tires. The truck industry is the most likely tire segment that would be willing to pay a premium for the cost saving benefits. The presentation describes that Goodyear tested interest of different segments of truck fleet operators and 58% stated that they would definitely or probably buy the AMT product. If proved successful the tire would then be used on all major market segments.

Attractive long-term play

It is quite difficult to estimate, what might be the financial impact of the product on GT bottom line. In the last 40 years there were only two similar game changing products – radial tire, and tubeless tire. While radial and tubeless ideas were off-patent and therefore the whole industry benefited, AMT is Goodyear´s invention and therefore it is GT who might benefit.

It is a new technology – the product might fail, or might remain marginal. I read most analysts reports on GT and all recent GT investor calls transcripts and there is no single mention of AMT. The market seems to ignore the product – it is not in GT price yet. One can view this as a free call option on the product launch – if it works out, the impact on the share price might be material, If it does not, there should be a little impact, as the market currently attributes zero value to the project.

Good time to enter

Since Goodyear reported the results on 7/30 the share price traded down by 18%. The market focused too much on a disappointing full year revenue guidance and discounted the cost savings the company achieved in the quarter. The costs savings enabled the company to report its most profitable quarter ever. The price move made the GT shares more attractive trading at 7.5 2015PE, well below the peers average of 11. We should see GT re-rating as market sees the cost savings are proven recurring.

Conclusion

GT at current share price offers an attractive entry point from both short-term and long-term point of view. In the short-term the stock should rerate as GT proves its costs savings will have long lasting effect on its profitability. In the long-term point of view the new AMT technology could be a game changing product. If successful the GT and its shareholders should benefit.

Link to the 2014 presentation:

(energy.gov/sites/prod/files/2014/07/f17/…)

Disclosure: The author is long GT.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s