Morgan Stanley: Michelin August Sales Present Good and Bad News

Analyst reports on Michelin’s tyre sales for last month show both an improvement over Morgan Stanley’s previous predictions and the continued decline of truck tyre sales on July, albeit at a slower rate than in year-to-date figures, representing a bittersweet day for Bibendum. The analyst said that truck sales “were somewhat disappointing in mature markets,” though the figures were “on track to exceed our volume forecast for the quarter. Assuming stable share, we estimate Michelin volume in Aug declined approximately 9 per cent versus our forecast of a 12 per cent volume decline in third quarter.” Predictions in the report were also variable in optimism, since the analysts believe improving declines should “turn into outright growth” towards the end of the year. However, pricing discipline and profitability could be affected over the next two years throughout the industry, as depressed volumes and lower raw materials prices put both at risk.

The report showed that passenger car markets are still down in Europe, but only by 1 per cent, which shows a “significant improvement in sell-in sales vis-à-vis year-to-date trends,” though comparable figures from August 2008 were “somewhat easy”. Undoubtedly improving were the figures in the North American PCR market, which saw an increase of 3 per cent. The report continues, “When excluding Russia and CIS, sales of RT in Europe showed positive growth (6 per cent), for the first time this year.”

Truck tyre markets continued to struggle all-round, with European OE sales down 68 per cent in August, “while RT volumes were down 17 per cent, the same growth rate experienced in July,” though August comparables were easier to beat. The report continues, “In North America, sales of replacement truck tyres declined by 17 per cent year-on-year, after a much milder 2 per cent decline last month.

Looking eastwards, “sales of Chinese RT truck tyres surged 25 per cent in August, while OE sales increased 28 per cent. Both marked significant improvements versus the year-to-date trend,” though the bank could not comment on year-on-year, since it does not possess comparables. “Brazilian sales of truck tyres are still facing tough comparisons that will not get easier until the fourth quarter. OE sales decreased by 31 per cent, while replacement fell 17 per cent.

“Improving year-on-year declines should inevitably turn to outright growth in many key markets by year-end with growth accelerating into the first half of 2010. This growth is expected versus depressed de-stocking comps and is required to maintain our current forecasts. Despite a return to growth, we believe depressed volumes and the tailwinds from lower raw material in the second half of the year will continue to put at risk the pricing discipline – and the profitability – of the industry throughout the next two years,” the report concluded.