Analysts: Bullish Pirelli meets expectations
During a recent roadshow with financial analysts Pirelli & C Spa chairman Marco Tronchetti Provera told the market watchers that the tyre industry is benefitting from an unprecedented combination of favourable conditions. Morgan Stanley analysts agreed, explaining that the Italian tyremaker’s upbeat comments support the bank’s thesis and “overweight” rating: “Pirelli remains an attractive second derivative play on booming premium car demand, offering unmatched premium tyre and emerging market exposure.”
According to Tronchetti Provera, the industry has changed thanks to new management, capacity cuts in the downturn, emerging market growth and strong product mix of “sophisticated tyre products.”
This all sits well in an industry context which observers including those at Morgan Stanley agree that “supply is very tight, both in passenger and industrial tyres.” In the midst of this Pirelli reportedly sees little prospect to increase output telling the analysts “we are already flat out” and that overcapacity will be unlikely during the next five years.
Which all means that prices for Pirelli and others able to supply a comparable calibre of products are likely to stay high for the foreseeable future. According to the analysts the global shortage of premium and winter tyre capacity and inventory looks set to underpin record pricing power. The investor’s note published on 17 May reports that “Pirelli sees a lot of synthetic rubber capacity coming on stream in next year or so, and see no fundamental shortage of either synthetic or natural rubber.” As high raw material prices ease, the financial analysts reported that tyre pricing could “adjust to lower raw material prices, but the time lag could temporarily boost margins.”
In addition the firm’s regional profitability is reportedly being successfully rebalanced, with Pirelli’s strong Latin American presence “losing its relative premium thanks to improving European margins (double-digit in the first quarter). North American sales are expected to benefit from the new Mexican plant (which will be completed around the first quarter of 2012) – an addition that is expected to free up local capacity in Mercosur. Furthermore, Russian expansion is seen as a “certainty. In Russia, Pirelli expects to sell 3 – 4 million tyres by 2012.
Looking forward to this year’s winter season, there is every indication that the same supply issues experienced across the industry (regardless of manufacturer) could be experienced this year. Morgan Stanley reported: “Pirelli says it has virtually no inventory here, and will produce right through until the end of the fourth quarter of this year (normally they switch to summer tyres by year-end).”
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