Slow European demand/Nokian profit warning leads to share price drops

Shares in Nokian Tyres fell by as much as 12 per cent following a profit warning issued by the company today (16 October 2012). According to Bloomberg, the fall was the biggest drop since 5 August with prices tumbling to 29.94 euros (down 11 per cent) as of 15:08. But it didn’t stop there and instead the market experienced a degree of negative contagion following this news and similarly gloomy demand projections from European tyre makers.

“Due to central European lower prices and clearly weakened demand, Nokian Tyres’ operating profit in the third quarter and in the second half will be weaker than in 2011,” the Nokia, Finland-based company said in a statement. And the reasoning behind the profit warning quickly led to falls in the share prices of other European tyre manufacturers. Bloomberg reported that Michelin & Cie fell as much as 5.2 per cent, while Continental AG fell as much as 4.8 per cent.

European replacement tyre sales, which account for about 75 per cent of the tyre industry’s revenue, will fall around 5.9 percent this year before rising 6 per cent in 2013, according to a Goldman Sachs Group Inc. research note published 12 September. At the same time the region’s car sales plunged 11 per cent in September, the biggest drop since October 2010, the European Automobile Manufacturers’ Association (ACEA) said.

Nokian results off the pace

According to pre-released information, Nokian Renkaat’s third-quarter operating profit was about 85 million euros (£68.755 million; $111 million) and revenue reached 365 million euros (£295.267 million). The figures are significantly behind analysts’ expectations of 105 million euros EBIT and revenue of 382 million euros.

Despite this, the company maintained its forecast that 2012 sales and operating profit will be higher than last year. But, as we have seen, this did little to reassure investors. Financial news sources report that the trading volume of Nokian Renkaat stock rose to 2.26 million shares on the day of the announcement, a figure that is more than four times the quarterly average. And most of this was less than favourable for the company. 

If the market watchers are anything to go by there are two reasons for this. Firstly because of the sheer size of the underperformance announced by the company. According to Morgan Stanley, Nokian’s numbers represent a full 21 per cent miss compared with the bank’s estimates and an 18 per cent miss versus the consensus of expectations within the financial community.

The second reason is more wide ranging and explains the signs of contagion that can be seen in the wider tyre sector. Announcing its profit warning Nokian noted lower prices and weakening demand in Central Europe. This confession did not relate to the emerging Russian and niche Scandinavian regions that have become the company’s speciality, but rather the mature markets of Europe. Bearing in mind that Nokian only has around 25 per cent exposure to Central Europe, the implications for the more established players are clear.

Although Nokian Renkaat is planning to publish its full third-quarter earnings report on 30 October, Morgan Stanley warned that “guidance of second half profit to fall year-on-year implies maximum EBIT of 214 million euros in the second half.” The consensus of expectations have been that the company would achieve 243 million euros and hence 129 million euros in the fourth quarter. The analysts further warn that this would leave full-year EBIT around 10 per cent shy of current consensus, and 15 per cent below Morgan Stanley estimates.