Morgan Stanley ‘Double Downgrades’ Michelin

Financial analysts at Morgan Stanley have downgraded Michelin stock to “underweight” and predicted Michelin will make a profit warning when it announces its first half 2008 results on 30 July. “We are double-downgrading Michelin…This year’s sharp rise in raw material costs may be the immediate source of pressure on earnings, but we think the bigger risk going forward is slowing OE and replacement demand,” the analysts explained. Describing the premium tyre manufacturers’ pricing discipline as “remarkable,” the bank predicted pre-tax (EBIT) profit margins would still fall to 7.3 per cent, near the company’s historical average, in 2008.

Explaining the reason for their rating downgrade, the Morgan Stanley analysts suggested Michelin’s truck and speciality tyre segment strengths could be weakness in a tough market for vehicle makers: “With 50 per cent of [Michelin’s] revenues coming from truck and speciality tyres, Michelin’s fortunes are tied to the industrial cycle more than any other tyre company we cover globally.” In addition, according to the report, around 30 per cent of revenue and 20 per cent of Michelin’s profits are said to be generated in North America where recent tyre demand has been particularly weak.

Michelin’s current target is to increase its full-year volume by 3.5 per cent, which according to the analysts means full-year 2008 operating profits will approach last year’s 1.645 million euros.

Morgan Stanley’s share price target now stands at 51 euros and assumes Michelin group operating margins reach 10 per cent by 2012 versus 8 per cent in 2006, 10 per cent in 2007 and estimates of 7 per cent in 2008.