Morgan Stanley Upgrades Michelin to Overweight, Doubles Target Price

Morgan Stanley analysts have upgraded Michelin shares to “overweight” and more than doubled their target price from 36 – 80 euros, commenting that the French tyre manufacturer “can surprise again.” This means analysts believe Michelin will beat consensus earning projections by more than a fifth: “We expect earnings to come in 20-25 per cent above consensus and cash generation to surprise significantly.”

In an investors note published 25 August, Morgan Stanley’s Eduardo Spina explained that the upgrade is based on the fact that while Michelin stock trades at a roughly 25 per cent discount historically, “high earnings visibility” and pent-up demand contribute to making it attractive. As a result Spin predicts that earnings per share will ramp up to 10 euros by 2012, 25 per cent above the consensus of 8 euros by the same point.

Morgan Stanley’s fascinating recent AlphaWise survey of European tyre wholesalers and distributors is said to enhance the firm’s confidence in its projections as it supports the theory that there is still more demand to come. In short this shows that “inventories are low, pent-up demand is just being released and price increases are sticking.” Altogether these findings reportedly remove the concerns that informed the analysts’ previous “underweight” rating.

Furthermore, recent market fears over raw material costs are said to be “overstated” in Morgan Stanley’s view: “The past decade shows how well Michelin can manage cost inflation. As long as volumes keep growing, we are confident industry discipline will stay intact. We estimate that Michelin can offset a further 10 per cent hike in raw materials with a mere 3 per cent price increase.”

Instead the analysts conclude that recovering volumes should reveal “structurally higher profitability, finally paying for high capital expenditure and working capital.”

Related News:

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