Michelin analysts’ “top pick”
With tyre demand said to be down between 2 and four per cent, financial analysts at Deutsche Bank confidently reported that the tyre companies under its coverage “should record strong results in the third quarter due to a still positive pricing environment”. Or in other words because manufacturers are said to be doing their best to maintain prices. And this is said to be coupled with a reported raw material tailwind.
While sounding optimistic, it has to be said that this opinion came before Nokian issued a profit warning on 16 October. And it preceded some of this year’s largest intra-day share price drops amongst leading tyre manufacturers too. However, the fact that these market analysts’ opinion was formed in the full knowledge of the slow demand environment (which was the key catalyst for the drop) and that they virtually predicted Nokian’s profit warning suggests theirs is an important counter trend argument to consider.
“We expect third quarter results to be strong,” the analysts wrote in an investor’s note dated 12 October, continuing: “However, Pirelli is not able to reduce its debt (which skyrocketed in the first half) and the third quarter at Nokian is slowing down (revenues and EBIT) from previous quarters.”
They analysts not only predicted Nokian’s warning, but also to some extent the broader share sell-off: “This could explain why the short position on these two names has doubled on previous quarter (respectively 12 per cent and 6 per cent of free float).
Deutsche Bank’s conclusion was that despite the environment and unravelling of any short positions, tyre results will generally remain strong: “While we expect an overall muted earnings season, with tyres again standing out we believe that none of these trends come as a surprise to investors. We nevertheless believe tyres will outperform component suppliers significantly in the third quarter…”.
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