Goodyear Tire
Market cap: $3.2 billion
2011 revenue: $23 billion
P/E ratio: 5.2
Dividend yield: 0%
Ticker: GT

It sounds counterintuitive. Demand for tires is cyclical, but because Goodyear's margins are tied to the economically sensitive price of natural rubber, the company sometimes earns its fattest profits when the economy is weakest. That's why timing is everything with this stock.

Since July, Goodyear shares have slid from $18 to $13, despite huge profit gains that should continue through 2012. The stock trades at a bargain five times projected 2012 earnings of $2.50 a share, with a microscopic 0.14 PEG ratio. "Keep in mind that those 2012 estimates are probably low," adds analyst John Birkett of Clough Capital Partners, which owns 2% of Goodyear's shares.

Goodyear's tire sales have rebounded since 2008 and 2009, with North American commercial sales expected to rise 13% for replacement tires and 50% for tires on new vehicles. (Truck tires account for only 8% of Goodyear's unit sales, but they generate 40% of operating profits, according to J.P. Morgan analyst Himanshu Patel.)

Meanwhile, costs have declined. Tires are tied to the price of natural rubber, and there's often a significant lag before Goodyear can pass along rising costs to consumers. That's what happened from January 2009 through February 2011, when the cost of natural rubber soared from 68¢ a pound to $2.81 and Goodyear wound up awash in red ink. The reverse is also true, however. Since February, rubber prices have fallen 36% because of oversupply and weak currencies in rubber producers such as Malaysia and Indonesia. The upshot: a significant recovery in Goodyear's operating margins, which were 7.6% in the third quarter, vs. 4.7% in the same period last year.

Moreover, Birkett doesn't believe Wall Street earnings estimates fully reflect the cheaper costs. He expects the company to earn closer to $3 a share in 2012 than $2.50. We don't see Goodyear as a long-term holding, but even if it earns $2.50 a share, the near-term upside is substantial. If its P/E nudges up to a mere 8, that would mean a $20 stock price, a gain of 54%.


By Jon Birger, contributor @FortuneMagazine - Last updated December 13 2011: 2:08 PM ET
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