Tyre Shares Outperforming Automotive Stock

Shares in tyre manufacturers outperformed most of the various European OEMs’ stock between 26 April and the end of May, in the wake of the Greek debt crisis. That’s the verdict of Deutsche Bank analysts, who wrote that tyre manufacturer’s resilience has on the whole been supported by their aftermarket sales.

In an investor’s note published on 28 May, the analysts pointed out that share prices in general dropped by an average of 12 per cent, in line with the market, with “a significant discrepancy” in the automotive sector: “On one side, the share price of tyre companies (namely Michelin, Continental and Pirelli) and of German OEMs (BMW, Daimler, VW) has been very resilient. On the other side, mass market OEMs (Fiat, PSA and Renault) have underperformed massively,” the report read.

From their point of view, the “relative out performance” of tyre companies can be explained by a combination of the recent weakness of natural rubber price and the fact that these operations run a more resilient aftermarket business, which accounts for roughly 70 per cent of sales.

Figure 1:The Effect of the Greek Debt Crisis on automotive share prices.  Source:Deutsche Bank

The underperformance of mass market OEMs is explained by the non recurrent scrappage incentives in Europe in 2010, which are expected to affect the mass market OEM more, and “an over exposed activity to Southern European markets which will suffer from Government measures to reduce deficits.” To summarise, in the mid-term German OEMs are expected to benefit more from their international exposure. However, in the short term, the “Southern European OEMs have probably been oversold,” say the analysts.

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