Analysts Increase Michelin Share Price Target Following Second Half Results

In the wake of financial results that Michelin characterised as being “more agile than ever,” financial analysts have raised their price targets for the tyre manufacturer by 7 euros from 29 to 36 euros. The Morgan Stanley analysts wrote in their investors note that they had upped estimates from the 2010 to 2011 earnings per share from 3.15 to 4.30 and 3.90 to 4.76 respectively. At the same time they issues a new 2012 earnings per share prediction of 5.98 euros.

Morgan Stanley reported adjusted its earnings estimates to account for “faster volume growth, better pricing but higher raw material costs.” In 2010 the analysts expect revenue growth of 10 per cent with volume increase to be “partially offset by decline in price/mix.” They report that volume decreased by 15 per cent in 2009, three quarters of which was said to have been due to inventory destocking at distribution level.

Looking forward to 2010, Morgan Stanley assumes a 12 per cent growth in replacement tyres, driven by the “absence of de-stocking.” In the same period they expect a 15 per cent increase in OE tyre sales due to higher car production levels, compared with historically depressed levels exhibited in 2009. In addition the predict that the prevailing market conditions will result in a 2.5 per cent drop in overall pricing due to a higher proportion of OE sales than normal. The result, say the analysts, is a 7 per cent EBIT margin, which compares to a long term average of 7.6 per cent. “Our earnings per share forecasts show 68 per cent year-on-year growth in 2010 and 11 per cent in 2011.”

Michelin most ‘tied to industrial cycle

While praising the company’s generally strong balance sheet, the analysts also pointed out that Michelin’s strategy of increasing its focus on industrial markets and emerging economies is being threatened by “volatile raw material input costs and a slowing consumer. Longer term, we expect end market replacement volume to dictate pricing power and, hence, share price performance.”

However, while the company’s renewed emerging market/industrial segment emphasis is seen as a strength, with 50 per cent of its revenues coming from truck and specialty tyres, the analysts also highlighted how Michelin’s fortunes are “tied to the industrial cycle more than any other tyre company we cover globally.” The result is that this could make
Michelin slower in recovering that it has been in past.

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