Deflated: 3 Reasons Why Morgan Stanley Turned Neutral On Goodyear

The long-term growth projections for Goodyear Tire & Rubber Company GT remain steady, but do little to impact the stock in the next 12 months, according to Morgan Stanley. 

The Analyst

Morgan Stanley analyst Armintas Sinkevicius downgraded Goodyear from Overweight to Equal-Weight and lowered the price target from $33 to $23.

The Thesis

Sinkevicius named three key reasons for the downgrade in a Monday note. (See the analyst's track record here.)

They are: 

◘ The tire company has lowered guidance for segment operating income by 20 percent on the basis of negative revisions to raw materials currency and a low demand for replacement tires.

“Our estimates are slightly below the low end of the guidance for 2018, due to more conservative estimates around volumes in 4Q18. Going forward, we see further downward pressure to 2019 estimates, with gradual improvement in U.S. replacement tire demand,” Sinkevicius said.

◘ Morgan Stanley remains bullish on long-term growth in miles traveled. Sinkevicius estimates that global miles traveled will grow from roughly 10 trillion to 20 trillion by 2020 and 30 trillion by 2040. Despite these projections, Goodyear has guided down substantially since the 2016 Investor Day, which could cause investors to overlook growth in miles traveled, the analyst said. 

◘ Goodyear's positioning is more balanced than it has been in the past, Sinkevicius said.

“The guidance for segment operating income of $1.45 billion to $1.50 billion in 2018 was lower than buy side expectations for $1.7 billion,as well as the $1.5 billion that the bears were looking for. We believe that the 15-percent move following the 18-percent downward revision to guidance was largely driven by short covering,” the analyst said. 

Price Action

Goodyear shares were down 2.22 percent at $23.74 at the time of publication Monday. 

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