Analysts: Increased Volume and Raw Material Costs, But ‘Robust’ 2Q for Tyre Majors

Market analysts at Morgan Stanley have predicted a “robust second quarter results season characterised by rebounding volumes and cost savings.” The volume of sales, which are reported to have improved from the low base of 2009, is said to be tyremakers’ biggest tailwind, but the increased cost of raw materials are also expected to kick-in in the manufacturers’ second quarter reports.

Raw materials are estimated to add a headwind of 300 – 440 basis points to the tyremakers’ margins, a trend that Morgan Stanley expects to accelerate through the rest of the year. Crucially, Morgan Stanley’s view is that while some of the numerous prices increases implemented up till now “are likely to feed through to the bottom line already,” they are note expected to cover more than a third of the input cost burden this quarter.

As far as the specific major tyre manufacturers under the banks coverage are concerned, the company believes the market will reward companies with: “healthier balance sheets [and] lower inventories” and therefore the analysts are open about preferring Pirelli stock over Michelin at the moment. They believe Pirelli is in a very attractive position thanks to “strong earnings momentum” helped by the spin-off of Pirelli RE in 2010 and a possible sale of the broadband division plus better visibility thanks to F1 supply. “Overweight Pirelli versus underweight Michelin is our favourite trade,” the investor’s note published 15 July concluded.

“Monthly market data suggests volume growth in the mid-teens for European tyre makers – with the exception of Nokian (up 24 per cent), which should benefit from depressed comps in the Nordic and Russian markets,” the analysts reported. However, channel mix is likely to be affected by stronger OE growth, partially offset by the structural shift towards “higher value-added tyres.”

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