Second-quarter 2011 S&P 500 earnings hit an all-time record of $25.44. One of the fastest-growing earners of the lot was Goodyear Tire & Rubber (NYSE:GT), whose EPS popped 442%.

This tire maker’s earnings growth was driven by more than just cost cutting — in the second quarter, it reported a 24% sales increase. Here are two reasons to consider investing:

• Very low valuation. Goodyear trades at a price/earnings-to-growth ratio of 0.10 — with a PEG of 1.0 meaning the stock is fairly valued — has a forward P/E of 4.6 on earnings forecast to grow 46% to $2.23 in 2012, and its price target of $22.17 is more than twice its current price.
• Great earnings reports. Goodyear has been able to beat analysts’ expectations in all of its past five earnings reports.

Two negatives:

• Flat sales and declining cash — but lower losses and less debt-laden balance sheet. Goodyear sales have remained about the same at $18.8 billion over the past five years, while its net loss has declined from -$373 million (2006) to -$216 million (2010). Its debt has fallen — but its cash has declined faster. Specifically, its long-term debt fell at a 10.2% annual rate, from $6.6 billion (2006) to $4.3 billion (2010), while its cash dropped at a 15.4% annual rate, from $3.9 billion (2006) to $2 billion (2010).
• Under-earning its cost of capital but getting better. Goodyear is earning less than its cost of capital — but it’s getting better. How so? It’s producing positive EVA momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half of 2011, Goodyear’s EVA momentum was 2%, based on first six months’ annualized 2010 revenue of $17.6 billion, and EVA that improved from first six months’ 2010 annualized -$822 million to first six months’ 2011 annualized -$385 million, using a 9% weighted average cost of capital.

Whether to invest in Goodyear is a difficult call. Based on past performance, it looks like this company is a financial mess. However, if future forecasts are accurate, the stock is trading at a huge discount to its value — giving investors a margin of error. Thanks to its track record of beating quarterly expectations, I’d give the edge to Goodyear’s bullish case.

Peter Cohan has no financial interest in the securities mentioned.