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The Ratings Game: Goodyear Tire stock’s worst day in 35 years created ‘deep value’ and a good reason to buy, analyst says

Shares of Goodyear Tire & Rubber Co. bounced Monday, after J.P. Morgan analyst Ryan Brinkman said the stock’s biggest selloff in 35 years on the back of disappointing financial guidance was an “overreaction,” and provided a compelling buy opportunity for investors.

The stock
GT,
+4.17%

had plunged 27.4% on Friday, the worst one-day percentage performance in since Oct. 19, 1987, a day known on Wall Street as “Black Monday,” after the company reported fourth-quarter earnings that beat expectations but said it expected 2022 free cash flow to be “around breakeven.”

On Monday, the stock bounced 5.2% in morning trading.

J.P. Morgan’s Brinkman upgraded Goodyear to overweight from neutral. He trimmed his stock price target to $23 from $25, but the new target still implied about 38% upside from current prices.

While the near-term stock performance could be “choppy,” Brinkman said he sees “deep value for patient investors.”

Based on conversations with investors, Brinkman believes they were especially disappointed by Goodyear’s guidance because they had expected a FCF outlook that was above forecasts, since investors believed the company would fare better than traditional auto suppliers in passing along supply chain costs.

“Overall, the selloff strikes us as an overreaction,” given what he foresees as needed reductions to segment operating income (SOI) and FCF expectations, and because pricing has been “quite strong” for the current cycle.

“Lack of FCF in 2022 is bound to be disappointing to investors, but the investment case to us, seems more delayed than changed, normalized SOI and FCF are meaningfully higher than recent performance, and we see several reasons to be positive on the shares at their new level,” Brinkman wrote in a note to clients.

The stock, which closed Friday at a five-month low, has tumbled 29.5% over the past three months, while the S&P 500 index
SPX,
-0.54%

has lost 5.7%.

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