Valorum Investing Posted November 28, 2018 Share Posted November 28, 2018 Goodyear Tire & Rubber Has A 50% Margin Of Safety GT is not a Durable Competitive Advantage company but it is a going concern (i.e. liquidation is not likely). GT should therefore be valued based on the Reproduction Value of it’s assets. At the current price GT is investable on a “cigar-butt” basis i.e. a 50% Margin of Safety versus Reproduction Value GT is about as “commodity” as it gets. Anyone can make and market a rival tire and the business is also very sensitive to commodity prices such as rubber. GT therefore has no Durable Competitive Advantage but it is a going concern (i.e. liquidation is not likely) therefore it should be valued based on the Reproduction Value of its assets. The reason such companies should be valued on Reproduction Value is because anyone can replicate their assets. If a company is very successful in selling a widget the market will recognise this and the value of it’s Equity will increase above it’s Reproduction Value. However, other capitalists will replicate their assets, compete with them, steal their market share and compress margins. Eventually the market capacity for the product will outstrip demand, sales and margins will fall and the value of the Equity of the companies within the industry will drop below the Reproduction Value of their assets. Companies will stop investing and replacing their assets and market capacity will decline. Eventually market capacity will decline to the point it can’t meet demand. Sales and margins will increase again and the value of the Equity in the companies will rise again to their Reproduction Value. However, when investing in Non-Durable Competitive Advantage companies we should always be aware that such poor businesses are liable to destroy value over time e.g. the company reduces it's asset base due to over-capacity therefore reducing the value of it's assets, or the industry never recovers due to terminal decline and the assets become essentially worthless. For this reason we should only invest with a 50% Margin of Safety. Reproduction Value equals the Reproduction Cost of Assets minus Debt. To calculate the Reproduction Cost of Assets we must adjust every asset on the Balance Sheet according to what it would cost an investor to replicate the business and then subtract Spontaneous Liabilities (arising from the normal course of business) and Circumstantial Liabilities (arising from past circumstances that are not applicable to a new entrant). The Reproduction Value of GT is $12.35B. In order to verify our valuation we must triangulate the Reproduction Value with a valuation based on Owner Earnings. The Owner Earnings value equals Owner Earnings divided by the Opportunity Cost percentage. However, the Owner Earnings of a Non-Durable Competitive Advantage company are likely to fluctuate therefore we must use an average of at least the last five years. The Owner Earnings value of GT is $11.95B. Comparing the above valuation of at $11.95B to the current GT Market Cap of $5.37B shows there is a 55% Margin of Safety at the current price. Once we have bought GT the question becomes when do we sell? A conservative strategy is to sell at 75% of Reproduction Value. This would produce a return of 50% on the investment and it mitigates the risk that the assessment of Reproduction Value was incorrect or that conditions turn again before the company reaches it’s Reproduction Value. Following this conservative strategy GT is a sell at Market Cap $8.06B ($34.56 per share). I bought in at $21.50 therefore I will be selling at $32.25 per share. If you would like to learn how to analyse a company’s Reproduction Value, Owner Earnings and all other elements of equity investment, visit www.valoruminvesting.com. Link to comment Share on other sites More sharing options...
Spekulatius Posted November 28, 2018 Share Posted November 28, 2018 Shouldn’t the reproduction value be based on the assets, not on their current earnings power? It looks like GT tangible assetsare about $4B while the market cap is $5.6B. Tangible assets are <> replacement value, as there are depreciated assets and with GT, the brand name certainly has some value. It also helps to look at competitors, Bridgestone and Sumitomo as well as the Koreans and Michelin trade at low multiples as well. Michelin IMO has the better brand name and should be worth a higher multiple. I also believe thet GT has a huge issue with pension obligation that need to be looked at. Link to comment Share on other sites More sharing options...
mcliu Posted November 28, 2018 Share Posted November 28, 2018 Is this an ad for his website? ::) Link to comment Share on other sites More sharing options...
Valorum Investing Posted November 28, 2018 Author Share Posted November 28, 2018 Yes the Reproduction Value is based on the assets. As you will see above I have calculated it at $12.35B. However, in order to triangulate the valuation we must also perform a valuation based on average Owner Earnings. As you will see above I have calculated it at $11.95B. As the two valuations support each other it provides confidence in the assessment of intrinsic value and the Margin of Safety against the current price. The Reproduction Value calculation takes account of all the Liabilities on the Balance Sheet, whether they are Circumstancial, Spontaneous or long term (including pensions obligations). Looking at competitors is not of a great deal of value when buying companies such as Goodyear because they have no Durable Competitive Advantage and tires are essentially a commodity business. Again, I explained this above. Link to comment Share on other sites More sharing options...
kab60 Posted November 28, 2018 Share Posted November 28, 2018 I'm not sure I agree this is just a commodity business. Some of these players, like Finnish Nokian Tyres and Michelin, actually sport a decent ROIC. Link to comment Share on other sites More sharing options...
John Hjorth Posted November 28, 2018 Share Posted November 28, 2018 Personally I agree with kab60 here, who also beat me to it with regard to Nokian Tyres. The Nordnet Blog - Thorleif Jackson [August 8th 2017] : Who is the winner in the tyre business. [so, a bit outdated, yes.] Link to comment Share on other sites More sharing options...
petec Posted November 28, 2018 Share Posted November 28, 2018 Valorum do you start Important Words with Capital Letters on your Blog? If so I cannot click on the Link because my Head will Explode. Link to comment Share on other sites More sharing options...
writser Posted November 28, 2018 Share Posted November 28, 2018 Is this an ad for his website? ::) Basically, yes. Here are some Arbitrary Numbers and you can pay a Lot Of Money for an account on my Website to see how I generated them using my Proprietary Valuation Model. Zero added value. I thought about reporting this post but maybe that's a bit too much. I'll just add the starter to my ignore list instead. Link to comment Share on other sites More sharing options...
flesh Posted November 28, 2018 Share Posted November 28, 2018 Personally I agree with kab60 here, who also beat me to it with regard to Nokian Tyres. The Nordnet Blog - Thorleif Jackson [August 8th 2017] : Who is the winner in the tyre business. [so, a bit outdated, yes.] I love the NOKIAN HAKKAPELIITTA R2! Been running this things for a decade, hands down best non studded tire out there. The problem is they are so grippy you've got to make sure you don't slow down too fast because everyone behind you can't, and you'll get rear ended. Link to comment Share on other sites More sharing options...
Valorum Investing Posted November 28, 2018 Author Share Posted November 28, 2018 Maybe “commodity”is too strong a word but I wouldn’t consider any tire maker to have a Durable Competitive Advantage. Terms such as Reproduction Value and Owner Earnings are definitely not proprietary (ask Google!) and they’re definitely not brainless formulas, they require some objective judgement by the analyst. Has anyone else performed a valuation of GT? Link to comment Share on other sites More sharing options...
John Hjorth Posted November 28, 2018 Share Posted November 28, 2018 Valorum Investing, CoBF is just such a tough site to start posting on. DIY investors all over the place, who actually happen to have an opinion, on about everything - all over the place. -Welcome to CoBF! [ : - ) ] Link to comment Share on other sites More sharing options...
shamelesscloner Posted September 22, 2020 Share Posted September 22, 2020 Goodyear Tire & Rubber Has A 50% Margin Of Safety GT is not a Durable Competitive Advantage company but it is a going concern (i.e. liquidation is not likely). GT should therefore be valued based on the Reproduction Value of it’s assets. At the current price GT is investable on a “cigar-butt” basis i.e. a 50% Margin of Safety versus Reproduction Value GT is about as “commodity” as it gets. Anyone can make and market a rival tire and the business is also very sensitive to commodity prices such as rubber. GT therefore has no Durable Competitive Advantage but it is a going concern (i.e. liquidation is not likely) therefore it should be valued based on the Reproduction Value of its assets. The reason such companies should be valued on Reproduction Value is because anyone can replicate their assets. If a company is very successful in selling a widget the market will recognise this and the value of it’s Equity will increase above it’s Reproduction Value. However, other capitalists will replicate their assets, compete with them, steal their market share and compress margins. Eventually the market capacity for the product will outstrip demand, sales and margins will fall and the value of the Equity of the companies within the industry will drop below the Reproduction Value of their assets. Companies will stop investing and replacing their assets and market capacity will decline. Eventually market capacity will decline to the point it can’t meet demand. Sales and margins will increase again and the value of the Equity in the companies will rise again to their Reproduction Value. However, when investing in Non-Durable Competitive Advantage companies we should always be aware that such poor businesses are liable to destroy value over time e.g. the company reduces it's asset base due to over-capacity therefore reducing the value of it's assets, or the industry never recovers due to terminal decline and the assets become essentially worthless. For this reason we should only invest with a 50% Margin of Safety. Reproduction Value equals the Reproduction Cost of Assets minus Debt. To calculate the Reproduction Cost of Assets we must adjust every asset on the Balance Sheet according to what it would cost an investor to replicate the business and then subtract Spontaneous Liabilities (arising from the normal course of business) and Circumstantial Liabilities (arising from past circumstances that are not applicable to a new entrant). The Reproduction Value of GT is $12.35B. In order to verify our valuation we must triangulate the Reproduction Value with a valuation based on Owner Earnings. The Owner Earnings value equals Owner Earnings divided by the Opportunity Cost percentage. However, the Owner Earnings of a Non-Durable Competitive Advantage company are likely to fluctuate therefore we must use an average of at least the last five years. The Owner Earnings value of GT is $11.95B. Comparing the above valuation of at $11.95B to the current GT Market Cap of $5.37B shows there is a 55% Margin of Safety at the current price. Once we have bought GT the question becomes when do we sell? A conservative strategy is to sell at 75% of Reproduction Value. This would produce a return of 50% on the investment and it mitigates the risk that the assessment of Reproduction Value was incorrect or that conditions turn again before the company reaches it’s Reproduction Value. Following this conservative strategy GT is a sell at Market Cap $8.06B ($34.56 per share). I bought in at $21.50 therefore I will be selling at $32.25 per share. If you would like to learn how to analyse a company’s Reproduction Value, Owner Earnings and all other elements of equity investment, visit www.valoruminvesting.com. You must be backing up the truck at the current market cap of $1.9Bn! Link to comment Share on other sites More sharing options...
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