Goodyear Financial

Valuation Project
BAFI 403
12/08/2007
WSOM 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.
WSOM BAFI 403 Goodyear Tire & Rubber Company Valuation 2

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

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

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.

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 4th 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.

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

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

Goodyear Strategy
Cost Saving
Continuous improvement/USWA union contract
Footprint reduction
Asia sourcing
SAG reduction
VEBA Insurance Deal
Gross Anticipated Savings: $1.8 - $2.0 Billion Over 4 Years

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)
*Reduced LT debt from $7.2B in Dec 06 to $5.0B in Sept. 07

Competitive and Financial Analyses

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.

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).

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.

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.

Market, Segment and Products (Cont.)
To counteract these conditions, each company has adopted a different strategy and focused on different segments.
Until 2003 Goodyear focused its strategy on high volume, low value tires while it grew its top line.
Michelin focused on high end-premium tires and followed a strict branding hierarchy.
Continental is a much more diversified company
(a good % of its business being in automobile electronics) and deals in both high and low end tires.
Bridgestone focused on a rounded product portfolio and leveraged its vertical integration; mainly its large stake in rubber raw material production.

Market, Segment and Products (Cont.)
Currently, Goodyear is well positioned for future success.
The brand is strong and well positioned in the market.
Its perceived as a quality brand with a good pipeline of
new products.
It is widely recognizable around the world and is consistently voted as one of the top and most admired companies.
Recent product introductions followed by industry accolades are helping Goodyear move towards a higher margin product mix and are driving top line growth.
This growth, coupled with aggressive cost cutting measures and landmark labor agreements have set the stage for financial success moving forward.

Competitor Analysis: Michelin
WSOM
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Goodyear
Goodyear
TireTire
&Rubber
& Rubber
Company
Company
Valuation
Valuation 18
Competitor Analysis: Bridgestone
WSOM
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Goodyear
Goodyear
TireTire
&Rubber
& Rubber
Company
Company
Valuation
Valuation 19
Financial Analysis
This section assesses Goodyears current and past performance as well as its expected future financial
prospects.
First, the product market performance is considered using
ratio-analysis.
Second, cash-flow analysis is used to determine the firms liquidity and financial flexibility and discusses
business risk.

Financial Analysis
Goodyear 10 year historical strategy & performance
The years from 1997 to 2007 can be divided off into two sections to tell an effective story about Goodyear.
2001-2002 should be considered the turning point for
the company.
At this point, the previous strategic direction the firm had adopted nearly put them into bankruptcy.
This was avoided by days and now the firm is on what should be considered a sounder footing and direction.

Financial Analysis
Goodyear 10 year historical strategy & performance
The new President and CEO Robert J. Keegan took over the office at Goodyear in 2002 and announced the future begins now with a solid turnaround strategy of
restoring profitability and growth for the troubled company.
The period from 1997-2002 was dominated by a more commodity based sales strategy, as Goodyear strove to grow its market share selling OE and private branded
value tires to please its shareholders with average dividend payouts of 30% of cash flow provided by operating activities.
The companys stock grew impressively during this time reaching a height of $75 per share.
Likewise during this time Goodyear leveraged itself quite aggressively. In fact, we noticed that there was very possibly
a strategy being employed by the shareholders to, in effect, milk the company as its increased leverage led to an escalating stock price and returns for
shareholders.

Financial Analysis
Goodyear 10 year historical strategy & performance (Cont.)

In 2000, when the stock market fell, the company began a slide
towards financial distress.
In 2002, enforced by a non-cash charge of $1.2 billion in tax
provisions, the firm reported a net loss of $1.22 billion.
The troubles culminated in the firm facing bankruptcy in early 2003
when it issued $1.3 billion long-term debt securities.
The company however was supported by its continued strong
R&D capability, focus on innovation, leadership, and brand
building which allowed it to launch several successful new
products just at the right time to help it skirt the most severe
financial troubles and buoy it for restructuring which continues
to the present.

Financial Analysis
The focus in 2004 and 2005 was on higher margin products and increased market and customer focus which successfully
drove sales.
In 2006, Goodyear announced that it would exit about half of its private branded value-line business, reducing it by approximately 8 MM units. Also, it has begun outsourcing some of
the remaining value-line production to Chinese suppliers.
This strategy allowed Goodyear to close down high cost plants in North America and lower the costs associated with producing low margin products.
The strategy involves some risk however as the manufacturers sourcing the product are outfitted to produce higher value added products (the various sized tires spoken of
earlier).
These suppliers could be tempted to leave the partnership with Goodyear if another suitor, more closely aligned with their best capabilities, approached them for tire supply.

Financial Analysis
In addition to product mix, Goodyear also is expanding capacity in Asia and Eastern Europe to serve those growing markets.
Investment in its own facilities in countries like China presents a risk in that the Chinese government cannot be completely trusted to not
nationalize foreign industry.
Similar threats have been carried out in Venezuela.
We dont consider this a high or even medium threat presently, but the regime in China is such that we cannot completely dismiss this possibility,
particularly with the nations extraordinarily rapid growth and what could well be concomitant social, economic and environmental turbulence.

Financial Analysis
In 2007, Goodyear extended an equity offering of 23 million shares of common stock, earning the company about $850 million.
This is being put towards refitting its manufacturing capability so that it may address the changing needs of the tire market
which now requires a wide variety of different sized tires
(13-22) for various standard cars and light and heavy trucks. Also Goodyear is interested in the growing airline tire market.
Also, Goodyear recently sold its Engineered Products Division for roughly $1.4 billion and used the money to restructure its debt.

Financial Analysis
10-year overview of net sales, gross profit and net income
Figure 1: Profitability

Financial Analysis
The margins
It is interesting to observe that between 2003 and 2006, sales increased about 30% from $15 billion to $20 billion dollars per year indicating that the turnaround efforts
were gaining momentum from a sales volume perspective.
At the same time though gross-profit declined which indicates that Goodyears ability to turn sales dollars into profits was impaired.
This stems from increasingly more expensive raw materials such as rubber, oil, and steel.
The price for natural rubber had doubled during 2006 and remains at high level. According to the 2006 annual report, overall a 17% increase in all raw materials was
pressuring on Goodyears margins.
In addition, Goodyear appears to have had difficulties passing along price increases through sales to customers, which could be related to strong competition in a rather
commoditized product market, where low cost is an important driver of overall performance.

Financial Analysis
Current Profitability and comparison with Competition
Goodyear vs. Michelin
Looking at Michelins asset management, Michelin consistently reports a lower Inventory Turnover Ratio than Goodyear due to maintaining higher levels of inventory.
Goodyear is also performing better in regards to managing its accounts receivable, beating out Michelin by 30 days in 2006 in its Accounts Receivable Days Ratio.
This of course reflects Goodyears value tire strategy of greater sales of less expensive tires.
One might almost consider this a Wal-mart like strategy of beating the competition with quicker turnover leading to faster sales, smaller inventory and handling
costs and buyer power with suppliers from whom you can possibly command smaller charges because you are paying them faster and thus lessening their own need to
finance.
Goodyear also maintains higher liquidity ratios than its competitor Michelin.

Financial Analysis
Current Profitability and comparison with Competition (Cont.)
Goodyear vs. Michelin
In the past four years, Goodyear has kept its Quick Ratio above a 1.0, whereas Michelin has failed reach this level of liquidity in the past five.
Decision makers should also note that Michelins liquidity level has been on the decline year after year, while Goodyear has shown improved liquidity over the same given time frame.
Overall Goodyear is showing good working capital management along with a stable cash flow position as illustrated in Figure 5.
Turning to profitability performance, Michelin seems to be operating more efficiently in relation to Goodyear, reporting a higher Operating Profit Margin for the past three years.
Michelins ROA and Gross Profit Margin have also been higher than Goodyears in the past five years.
Goodyears poor profitability performance seems to be attributable to the companys higher costs directly related to costs of goods sold as seen in Figure 3.

Financial Analysis
Bridgestone Analysis
Bridgestones Inventory Ratio falls just short of Goodyears figures every year for the past five years.
Bridgestones Asset Turnover ratio has decreased every year for the past five years.
On the other hand, Bridgestones asset management earns high marks for gradually reducing its Accounts Receivable Days Ratio
14% over the last five years.
However, this ratio still does not compare to the low levels of Goodyears receivables.

Financial Analysis
Taking a look at Bridgestones financial management ratios, one can see significant decreases in company liquidity.
Bridgestones Current Ratio declines every year for the past four years for a combined 28% drop, while Bridgestones Quick Ratio declines every year for the past four
years as well for a combined 38% drop.
Despite these apparent changes in company liquidity, there is little need for concern as the current level of these ratios remains relatively safe.
Approaching 2006, Bridgestone, and the entire tire industry, appear to be slowly losing profit margins.
However, Bridgestone has still managed to consistently produce higher Gross Profit Margins and Operating Profit Margins than Goodyear over the past five years.
The resulting depressed profitability figures for Goodyear resonates in the companys high cost of goods sold
(see Figure 3).

Financial Analysis
Gross-Profit Margin Comparison
Figure 2: Gross-Profit Margin comparison

Financial Analysis
Operating Profit Margin Comparison
Figure 3: Operating Profit Margi

Financial Analysis
Net Profit Margin Comparison
Figure 4: Net Profit Margin

Financial Analysis
The overall lower operating profit margin of Goodyear compared to Bridgestone could indicate that the firm
pursued a differentiation strategy which requires overall higher SG&A costs, more R&D, more frequent new
product introductions, high-end products, branding activities, support and full service activities.
However, the overall lower gross-margins contradict the differentiation strategy and suggest rather a low-cost
approach.

Financial Analysis
Michelin has been able to improve its operating management between 2003 and 2005 significantly and outperformed both Goodyear as well as Bridgestone in 2005 and 2006.
What business activities cause Goodyear to under perform at the operating margin? Goodyears strategy through the 1990s focused on high-volume, value-line tires with
small margins. Michelin has focused on the premium, high-margin segment. As raw material prices have increased, the margins on the value-line products have been
reduced by a higher percentage. This has resulted in much lower operating margin for Goodyear when compared to Michelin and even Bridgestone.
Goodyears strategy moving forward is to focus on reducing their share of the value-line business and increasing their share of the premium, high-margin business. They are
also aggressively pursuing cost reductions in materials, manufacturing and other operations. These strategies should help Goodyear command more dollars per tire in price
and reduce the cost per tire to manufacture. The coupling of these strategies will result in higher operating margins and more flexibility to compete for shelf space with
competitors.

Cash Flow Analysis
Cash Flows
Despite a 300 million loss in 2006, Goodyear was able to generate positive cash flow from operating activities during the year.
Overall, the firm has had positive cash flow from operating activities throughout all ten years with exception of 2003.
Cash flows from operating activities appear to be quite
volatile though.
Significant investments in property plant and equipment have been made in 1999 and 1998 and at a smaller scale continuously throughout the remaining years.
Three major financing events occurred.
In 1999, the firm increased borrowings by $1.4 billion.
In 2003 it added $1.4 billion in debt.
In 2006, the firm issued $1.7 billion debt.

Cash Flow Analysis
Cash Flows
As discussed earlier the 2003 debt issuance had to do with the turnaround and refinancing activities in the face of distress.
The fact, that the company yet again issued significant portion of debt in 2006, indicates that it still faces
significant difficulties.
The 2006 annual report discloses that Goodyear has sold off several non-core businesses and continuous with this divestment strategy.
Change in cash has been positive and increasing; the strongest peak being in 2006, when the firm was able to increase cash by 80% compared to the beginning of the year.
Net income and net cash from operations are moving closely together, particularly in the last 3 years. This indicates no unusual events for Goodyears accounting policies or
practices. The Cash flow from operations to sales ratio declined in 2006 to 30% which indicates that the firm struggles increasingly to translate sales dollars into cash
compared to 2005 and 2004, when 40% of sales manifested in cash flow from operations.

Cash Flow Analysis
Cash Flows
Figure 5: Cash Flows

Cash Flow Analysis
Income and CFO
Figure 6: Income and CFO

Cash Flow Analysis
Future prospects, growth potential, and business risk
for Goodyear
Goodyears results of operations, financial position and liquidity could be adversely affected in future periods by loss of market share or lower demand in the
replacement market or the OE industry, which would result in lower levels of plant utilization and an increase in unit costs.
Also, the firm could experience higher raw material and energy costs in future periods.
These costs, if incurred, may not be recoverable due to pricing pressures present in todays highly competitive market and Goodyear may not be able to continue
improving its product mix.
Future results of operations are also dependent on the firms ability to successfully implement cost reduction programs and address increasing competition from low-cost
manufacturers.

Cash Flow Analysis
for Goodyear (Cont.)
With this, the major drivers of ROE are strongly limited as asset turnover is expected to remain stable or otherwise decrease if demand slows down and utilization decreases, profit margins will be
crucial.
However, the firm has had as discussed earlier much lower margins than its competitors Michelin and Bridgestone and will struggle with these due to environmental cost conditions pertaining to raw
materials and consumer unwillingness and inability to pay premium prices.
The currently extreme high leverage most likely must be reduced in the future and recent equity offerings confirm this trend, which in return will impact ROE negatively.
The overall growth rate is expected to align with averages in the US due to the effect of mean reverting.
Industry structure and competitive environment will also constitute limitations to ROE.
As a matter of fact, Goodyear has achieved high ROEs solely due to financial leverage and as this must decline in the future, ROE is expected to be lower.

Cash Flow Analysis
Key Data

Cash Flow Analysis
Comparing Goodyear to its competitors in a couple of key margins provides insight into the future business risk which must be considered highest among the three compared companies.
The key drivers of ROE indicate various strategies toward
return generation.
While Goodyear shows low margins compared to the competitors, it has higher asset turnover.
In an environment with dominating market share and stable demand for products, this position of Goodyear might be sustainable.
However, industry structure and future expected developments as described, indicate that weak margins cannot be compensated which results in an overall low return on assets for
Goodyear versus Bridgestone and Michelin.

Cash Flow Analysis
The other key driver for ROE is financial leverage and it is obvious that Goodyear, in contrast to its competitors, is pursuing a different financial policy with a
highly levered balance sheet.
This can result in excessive shareholder returns during stable business environments, however, in unstable environments it can pose a major business risk.
The high beta for Goodyear of 2.6 indicates that investors internalize these circumstances as they reflect a higher volatility of stock prices compared to the
market.
Bridgestone has the lowest beta of 0.9 followed by Michelin with beta of 1.59, and 1.78 for the industry benchmark.

Valuation Analysis

Purpose
Based on preceding
Business and Industry Analysis of Goodyear
Historical and Financial Analysis
Competitor Comparison in the industry
Future economic prospect for the firm and the industry
Conducting Valuation Analysis of Goodyear Rubber & Tire
Over a 10 year time frame
With the goal to determine ultimately the best estimate of
current stock price per share
Based on 3 economic scenarios

Methodology for Valuation (DCF-Analysis)
Using the Discounted Cash Flow Valuation Technique
Forecast essential financial statements
Income Statement
Balance Sheet
Cash Flows
Based on
Percentage of Sales method
And Assumptions about
Operational future performance of the firm
Expected capital structure policy changes
Expected cost of capital
3 General economic scenarios

Objectives
Establish best estimate of Present Value:
Of the Firm
The Value of the Firm is obtained by discounting expected cash-flows to
the firm
Cash flow to firm: the residual cash-flows after meeting all operating
expenses and taxes, but prior to debt payments and without the benefit
of tax-shelter
Discount rate: weighted average cost of capital (WACC)
Of Common Equity
The Value of Equity is obtained by discounting expected cash-flows to
equity
Cash flow to equity: the residual cash-flows after meeting expensed,
meeting all tax obligations and interest and principal payments
Discount rate: rate of required return by equity investors (CAPM)
Determine stock-price per share

Variable Forecasting Control Parameters
Incremental Sales Growth Rate for each year
Gross-Profit Margin
Indicating the companys ability to charge premium prices
Lowering their costs of goods sold
Operating-Profit Margin
Operational efficiencies and ability to manage firm effectively
Total Asset-Turnover
Proxy for the ability of the firm to utilize assets and their
infrastructure. The need for further investment in property, plant
and equipment
Debt / Equity
How much leverage will the firm use in the future? What capital
structure policy changes might influence the return of the firm?

Variable Forecasting Control Parameters (cont.)
Current Ratio
Coverage of short term liabilities with cash and equivalents
The Cost of Debt
Depending on economic scenario, inflation, company bond rating
The After Tax Cost of Debt
The Cost of Equity
Depending on risk premium, beta for the firm, and country risk
premium
Beta for the Firm
Based on historical movement of Goodyears stock vs. market

Fixed Firm-Specific Parameters
The corporate tax rate for Goodyear assumed to be 35%
Depreciation on PPE assumed to be 53%
Estimated using historic average percentage of PPE
Depreciation Expense per fiscal year assumed to be 4%
Estimated using historic average percentage of Sales
Current Liabilities portion assumed to be 24%
Approximated using historic average of Sales

Fixed External Parameters
Based on Financial-Market Research
Risk Free Rate assumed to be 4.5%
Computed based on 10 year average (1997-2007) of 10 Year
Government T-Bonds
Expected Market Return assumed to be 8.3%
Historical arithmetic average of S&P 500 since 1928 (80 years).
Market Risk Premium assumed to be 3.8%
20-year arithmetic Average

3 Economic Scenarios and Assumptions

Recession:
Sales are going to decrease
Margins are decreasing due to price pressure
Leverage going up due to need for borrowing to cover
liquidity issues having low cf
Beta estimated to be high due to bond grading, due to
leverage, due to risk
Cost of debt is high at 9%
Cost of equity is about 15%

Recession:
The market and economy are stagnate or in recession. GT struggles
to grow sales revenue but maintains levels based on execution of
their product mix and cost cutting strategy. Low margins result in
the inability to de-leverage any further but the bad economy keeps
interest rates low.
The soft economy keeps raw material cost increases lower than in
previous years. GT profit margin is flat via management execution
of strategic plan.
The cyclical nature of markets see improvements by 2011

Recession (cont.)
Cost of Equity = 15.9% (including
2% country related risk)
WACC for the 10 years
forecasting period (to 2017)
RECESSION
Beta 2.47 2007
Value of Equity
$ 5,386
Stock Price
$ 25.51
Value of Firm
$ 12,629
Flat:
Sales increase initially a little due to positive effect of product mix and
restructuring
But then remain stable without much growth
Decline slightly at the bottom of the period and will slight come back
Margins decline slightly as the effect of products towards higher margin
products do not materialize fully
Leverage will remain lower as the strategy and policy changes manifest
Yet borrowing will become necessary again mid of period in order to
support lacking revenue streams
Beta of 1.7 as rating improves due to restructuring then stable due to
un-levered balance sheet
Then increasing to 1.9 mid term to reflect the new borrowings

Flat
The market and economy are estimated to be relatively
flat. GT maintains a low growth in sales revenue based on
execution of their product mix strategy.
The soft economy keeps raw material cost increases lower
than in previous years. GT profit margin increases slowly
via management execution of strategic plan

Flat (cont.)
Cost of Equity = 13% (including
FLAT
Beta 1.7 2007
Value of Equity
$ 7,762
Stock Price
$ 36.76
Value of Firm
$ 18,002
Boom
20 B to 28 B B Net Sales is a reasonable assumption based on
History steady increase rate in sales
Increased prices due to higher raw materials higher margins
Product mix and strategy objectives fully materializing
Larger customer base
Emerging markets, more infrastructure
More international business
Approaching competitor margins due to high margin products
Un-levering the firm pays off and debt to equity is improved
Mid term new expansion and borrowings in order to benefit tax-
shelter again and increase ROE
Cost of debt decreases as bond rating will improve
Beta at the 10-years historic price fluctuations

Boom
The market and economy continue to grow. GT increases sales revenue
based on execution of their product mix strategy and strong global
presence.
The growing economy sees raw material costs continue to increase but
they are offset by price increases and product mix. GT profit margin
increases rapidly via management execution of strategic plan

Boom (cont.)
Cost of Equity = 12% (including
BOOM
Beta 1.45 2007
Value of Equity
$ 14,249
Stock Price
$ 67.48
Value of Firm
$ 41,377
3 Sales Revenue Projections

3 Different Stock Prices
Future Economic Outlook 10 years

RECESSION FLAT BOOM
2007 2007 2007
Value of Equity Value of Equity Value of Equity
$ 5,386 $ 7,762 $ 14,249
Stock Price Stock Price Stock Price
$ 25.51 $ 36.76 $ 67.48
Value of Firm Value of Firm Value of Firm
$ 12,629 $ 18,002 $ 41,377

Best Estimate based on Probability
Best Estimate
Probabilities 2007
Boom = 20%
Value of Equity
Flat = 50%
Recession = 30%
$ 8,346
Stock Price
$ 40
Value of Firm
$ 21,065

Best Estimates
Conclusion
Goodyear Tire and Rubber Company is well positioned to grow in profitability
in the next ten years in either a boom, flat or bust scenario. This is because
Goodyear has taken steps to align its corporate strategy with the changing
competitive landscape for its products and has adjusted its financial strategy to
fit this direction.
Goodyear is changing from being essentially a highly leveraged mass low
margin cheaper tire seller paying high dividends to shareholders to a more
equity financed higher margin targeted seller of quality, differentiated tires. They
will grow with this strategy because there is potential in the high margin
differentiated market in the otherwise flat North American and European markets
which comprise 75% of Goodyears sales. Goodyear can capture the growth in this
market by leveraging both its brand and its superior R&D capability.
Goodyear is supplementing this with a lower risk maintenance of low margin
tire selling to emerging markets in Eastern Europe, Asia and Latin America. Odds
are these markets will grow to become enamored of Goodyears higher margin
tires over time.
While there are risks due to increasing costs of raw materials and ever
increasing competition from rivals, we feel Goodyear is a good buy for investors
looking for a stable growth stock paying less dividends in the next ten years.

Appendix

Country Risk
To estimate country risk, find country rating (www.moody.com) and estimate

default spread for rating over a default free government
bond rate.
Basis: Traded country bonds.
This becomes the added risk for the country and is added to historical risk premium for a
mature equity market (U.S.) to get total risk premium.
Multiply default spread by relative equity market volatility
(STD DEV. in country equity market/STD DEV. in country bond.)
Emerging market average = 1.5 (emerging equity markets approx. 1.5 X more volatile
than bond markets.)
Estimate of country Risk Premium.
Add this to U.S. Historical Risk Premium of 3.8 to get the total risk premium.

Country Risk
Making Lambdas
Company has exposure to country risk different from exposure to all other market risk.
Call this Lambda and, like Beta, scale around 1
(>1 = greater country risk; <1 = less country risk)
The cost of equity for a firm in this market is written as:
Expected Return = Rf + Beta (Mature Market Risk) + (County Risk)

Country Risk
Lambdas
Companys risk exposure to country risk reflects revenues it derives from the country.
Goodyear can have exposure to country risk because it has revenues from and production
facilities within these markets.
Estimate Lambdas by revenues.
A company getting a smaller % of its revenues from a market should be less exposed to
country risk than one with a larger %.
To get Lambda, scale % of revenue company gets from a country, dividing it by % of
revenues all companies in the market get from the country, i.e. its local GDP.
For example: Goodyear did approximately 0.018 (1.8%) of its business in Brazil
compared to .92 (92%) for the average company (8% of Brazils GDP was in exports and
92% local), so we measure Lambda as 0.018 / 0.92 = 0.02 and we multiply this by the
country risk premium (0.0486) 4.86% which is the difference between the mature
equity risk premium of 0.038 (3.8%) and country premium of 0.0866 (8.66%).
0.0486 x .02 = 0.00097 and this is then added to the cost of capital. The process
is repeated for each country Goodyear does business in that has risk beyond the
mature market equity premium.

Country Risk for Goodyear
Estimate % business done in each country out of approx. $18.5 billion in net revenues.
N.America: $10 billion: US: 6 billion = 30%
Canada: 2 billion = 10%
Mexico: 2 billion = 10%
European Union: $5 billion in sales
Average across 7 countries
$.71 billion EA = 24.5% (3.5% EA)
Eastern Europe, Mideast, Africa: $1.6 billion
Average across all 3 countries
$.53 billion EA = 7.2% (2.6% EA)
Latin America: $1.8 billion
$.36 billion EA = 9% (1.8% EA)
Asia Pacific: $1.6 billion
$.145 billion EA = 8% (.72% EA.)

Country Risk
(2.1%)

Goodyear Financial

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Goodyear Financial

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Valuation Project

WSOM BAFI 403 Goodyear Tire & Rubber Company Valuation

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The tire industry sells through two basic channels:

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In 2003 Goodyear was on the brink of bankruptcy. They were overloaded

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Goodyear has stated the following strategies to

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Improved Product Mix

Source: Goodyear 3Q2007 Earnings Presentation, Goodyear.com

Gross Anticipated Savings: $1.8 - $2.0 Billion Over 4 Years

Source: Goodyear 3Q2007 Earnings Presentation, Goodyear.com

De-leveraging/Improved Balance Sheet

*Reduced LT debt from $7.2B in Dec 06 to $5.0B in Sept. 07

Source: Goodyear 3Q2007 Earnings Presentation, Goodyear.com

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Goodyear 10 year historical strategy & performance (Cont.)

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Gross-Profit Margin Comparison

Figure 2: Gross-Profit Margin comparison

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Operating Profit Margin Comparison

Figure 3: Operating Profit Margi

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Net Profit Margin Comparison

Figure 4: Net Profit Margin

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Figure 5: Cash Flows

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Income and CFO

Figure 6: Income and CFO

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