Morgan Stanley Boosts PT on Goodyear Tire (GT) to $24 Amid Seeing Multiple GM Headwinds
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Morgan Stanley is lifting its price target on Underweight-rated Goodyear Tire & Rubber (NYSE: GT) from $20 up to $24, seeing upcoming pressure on margin levels.
The firm commented today:
We see margin headwinds from consumers potentially trading down on tire brand mix, outsized exposure to low margin OE customers in the =17" segment, excess capacity in the core Through 2020, GT expects incremental demand in the =17" segment to be well in excess of incremental supply in the Americas and in Asia and to be very closely matched in EMEA. However, GT's expectations are based on the =17" segment growing at 15% CAGR through 2020, more than double the 7% CAGR expectations of its Tier 1 peer, Michelin. The differing expectations point to either tight supply or significant oversupply, depending on which you look at. We expect uncertainty around growth expectations to remain a meaningful overhang on the tire industry and GT in particular. Michelin also expects the overall tire market to grow at a 2.5% CAGR through 2020 well below GT's expectations of a 4% CAGR.
We expect consumers to trade down on tire brand to offset a trade up in tire size. Affordability of the =17" tires in recent years has been in large part helped by declining raw material prices. Our raw material price index has declined 65% since May 2011. Consumers largely view tires as a commoditized product, making price more important in purchase decisions than brand. Our tire consumer survey in the past revealed that price and value for money were among the top reasons for choosing a replacement tire while brand of tire and OEM fitment were among the lowest factors. We believe it could be difficult to expect the consumer to pay a premium for brand as well as trade up on size given availability of affordable alternatives. It becomes more challenging if raw material prices continue to rise.
Low margin OEM sales are expected to make up ~50% of =17" demand even by 2019, leaving room for pricing pressure. Despite a 15% CAGR for 2015-2019, the =17" segment is expected to account for only 26% of the market in 2019. OEMs are expected to account for almost half of those sales even by 2019 as opposed to the normalized industry share of ~30%. We believe it would be difficult to sustain margin performance given the exposure to OEMs and their constant focus on cost reduction, which is especially pronounced at this point in the cycle. This is particularly true for NA and Asia where GT margins are at record levels in the high teens. GT has 55% exposure to OEMs in the =17" segment.
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