Michelin Upgraded to ‘Buy’ Following Better than Expected Results

Analysts at Deutsche Bank have upgraded their rating for Michelin shares to “Buy” following first half 2010 financial results that were better than expected. The results published on 30 July show that revenues were up 17 per cent, mostly driven by volume growth of 15 per cent. According to the analysts, this was “by far the main earnings driver” since raw material price increases had no negative impact on first half results due to a lag effect. Overall first half 2010 operating income (822 million euros) virtually caught up with the firm’s full-year 2001 operating profit of (862 million euros).

Looking forward, the company’s management is now aiming for a full year operating margin of close to 9 per cent (1.5 billion euros), underscoring that in the second half the group should be able to more than offset a raw materials price headwind of 650 million euros.

Writing in an investors note published 3 August, Deutsche Bank’s Gaetan Toulemonde said that Michelin is in a strong position to achieve its goals: “After the strong volume recovery this year, volume growth should be back to trend, i.e., +3 per cent per annum, driven by a more stable replacement market (75 per cent of volumes). And the full-year effect of this year’s price increases should more than offset a leftover raw material headwind of 150-200 million euros. Overall, the operating margin should further increase by almost 100 basis points and get close to management’s target of 10 per cent.”

Car tyres margin enters double figures

Broken down by segment, Michelin’s first half figures reveal the firm’s passenger car and light truck business saw net sales rise 17 per cent in the first half to 4,621 million euros, while operating margin stood at 10.8 per cent, compared with 6.3 per cent in the first-half of 2009. According to the company, the high operating margin resulted from “the steep upsurge in sales volumes, supported by the across-the-board recovery in demand and the Michelin brand’s firm resilience, with early-year price increases offsetting the adverse impact of the OE/replacement market mix.”

.Truck tyre sales rose 23.9 per cent year-on-year to 2,566 million euros in the first half. Operating income stood at 126 million euros, or 4.9 per cent of net sales, compared with an operating loss of 163 million euros in first-half 2009. The performance rebound was fueled by the sharp increase in sales volumes.

Net sales from the Specialty Businesses amounted to 1,162 million euros for the first six months of 2010. This segment boasted by far the best operating margin at 17.1 per cent. And this was despite “price adjustments resulting from the application of contractual clauses indexing prices to raw materials costs, particularly in earthmover tyres.”

Michelin to announce 3% car tyre price increase in September

The analysts may have said that raw material price increases “had no negative impact” on Michelin’s first half results, but the firm reports that this will change in the second half of 2010. That said while rising raw materials costs will have a negative impact on second-half consolidated results (and reduce full-year income by 600-650 million euro), the tyre manufacturer reports that it will benefit from the price increases introduced in the first half.

In addition, the group is announcing around a 3 [ increase in its passenger car and light truck replacement tyre prices in Europe starting in September. Furthermore, with the clear rebound in the tyre markets expected to continue in the second half of the year, even though the pace of economic recovery will vary from one region to another, the Michelin that outperformed in the first half is said to be on-track to at least meet it targets in the second half of the year.

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