By Jan Martine
The Goodyear Tire & Rubber Company (NASDAQ:GT) has been working on an innovative new tire technology for almost six years now. The product should come to the market early next year. The technology is called Air Maintenance Technology or AMT. The technology was named one of 2012’s best inventions by Time Magazine. The idea is a tire that can pump itself by rotating to maintain tire pressure at a constant level. The AMT tire utilizes a peristaltic pump technology. Basically there is a small pipe molded in the side wall of the tire, and as the tire rotates the pipe is squeezed at the bottom and that pushes the air in the pipe into the tire.
Most personal and commercial vehicles today are driven with under-inflated tires, which results in: (i) higher fuel costs, (ii) reduction in tire life, (iii) increased likelihood of tire breakdown and (iv) reduced safety. This new product should resolve this issue. It took Goodyear more than five years to develop and the launch is planned for the first half of 2015.
Goodyear received financial support from U.S. Department of Energy to develop the new tire. The Goodyear Tire & Rubber Company (NASDAQ:GT) reports its progress annually to the DoE. The presentations are publicly available on DoE web site (see the link to the June 2014 presentation at the end of the article).
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Goodyear is planning to launch the AMT on truck tires initially. The truck industry is the most likely segment that would be willing to pay a significantpremium for the cost saving benefits. The presentation describes that The Goodyear Tire & Rubber Company (NASDAQ:GT) tested interest in different segments of truck fleet operators and 58% stated that they would definitely or probably buy the AMT product. If proven successful, the tire would then be expanded into all major market segments.
Goodyear Tire & Rubber: Attractive long-term play
It’s difficult to estimate the financial impact of the AMT tire on GT’s bottom line. In the last 40 years there were only two similar game changing products — the radial tire and the tubeless tire. That said, the radial and tubeless ideas were off-patent and therefore the whole industry benefited, and AMT is Goodyear´s invention and therefore only they (and the U.S. military) stand to benefit for some years.
However, as with every new technology, the product might fail, or might become a marginal seller. AMT is not well known yet, and has not been mentioned almost at all in investor calls or by analysts. The market seems to ignore the product, so it’s fair to assume it’s not baked in the share price yet.
Good time to enter
After The Goodyear Tire & Rubber Company (NASDAQ:GT) reported the results on July 30th, shares traded down by almost 20%. The market focused on disappointing full year revenue guidance and discounted the cost savings the company achieved in the quarter. The costs savings enabled the company to report its most profitable quarter ever. The move has created an attractive entry point, as GT now trades at 7.8X forward-looking PE, which represents 25% discount to the peer average of 10.4X. We should see GT’s share price improving as the market sees the cost savings are proven to be recurring.
Goodyear at the current price offers an attractive entry point from both short-term and long-term point of view. In the short-term the stock should improve as GT proves its costs savings will have a long-lasting effect on its profitability. In the long-term, the new AMT technology could be a game changer product.
Link to the 2014 presentation: